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How Delinquent and Defaulted Debt Differ and What You Can Do About Each

Delinquent Debt

How Delinquent and Defaulted Debt Differ and What You Can Do About Each

If you’re an adult in a developed or a rapidly growing country, there’s a good chance you purchase with credit at least a little. If you’re an adult in the U.S.A., however, it’s not only likely that you use credit, but you wouldn’t be uncommon not to pay it off.

Living with debt is more than an acceptable part of U.S. society — it’s the standard. When our friends and relatives carry mortgages, student loans, vehicle payments and, worst of all, revolving credit card balances — doing the same doesn’t feel as problematic.

But taking on a lot of debt is a recipe for disaster. When the combination of all of our loans and interest become too much to bear, we can become delinquent, even default.

Here’s how delinquent and defaulted debt differ, and what you can do about each if you find yourself entering these dangerous territories.

What Is Delinquent Debt?

Delinquent debt means that the loan holder is behind on payments. For some types of loans, such as a personal loan, mortgage or student loan, debt can be declared as delinquent after one installment is missed or a debtor is behind one day on their payments.

In cases of credit card debt, it might take a few missed payments before an account is deemed delinquent. In cases where a loan is secured, like an auto loan or mortgage, repossession or foreclosure can occur after just a few missed payments. While there’s nothing to repossess with unsecured debts, delinquency is still serious as it negatively impacts credit scores.

What Is Defaulted Debt?

Delinquent debt that remains outstanding eventually becomes defaulted debt. Again, the amount of time it takes for an account to go into default depends on the type of loan. Unsecured loans most commonly default because there’s nothing for the lender to repossess during delinquency.

Each state has its own regulations for how long it takes for personal loans and credit card debt to go into default, but typically it’s between 90–120 days. Federally issued student loans, on the other hand, go into default at 270 days of non-payment, or 9 months. At that time, the lender will demand the entire balance of the loan.

While delinquent debt isn’t ideal, it’s a far cry from defaulting on a loan, which decimates your credit score and stays on your credit report for seven years. The real-life consequence of this is having significant difficulty borrowing in the future.

Other consequences can occur depending on the loan, too. If you default on a federal student loan, for example, the government can garnish your wages, withhold your tax refund, and render you ineligible for any other type of aid.

And unlike delinquent debt, you can’t just pay the overdue amount plus applicable fees and call it good. When you’ve defaulted, lenders typically require payment on the full loan amount.

What You Can Do About Delinquent and Defaulted Debt

No matter what type of loan you have, if you think you might have trouble making your payments, it’s wise to contact your creditor before you actually miss the payment.

Being proactive about your situation might net you some more time to gather the funds. If you’re skeptical about the feasibility of this strategy, remember that lenders would prefer not to repossess your assets or send your debt to collections. Doing so loses them most of the value on the loan.

However, if it doesn’t seem like you’re going to pay, they’ll send the debt into default. Communications from collectors will be constant, and your hope of getting any kind of payment grace period will be long gone. At this point, the only way out of this mess is to pay the collector, commit bankruptcy, or try to make an offer to the lender to settle the debt. The one silver lining with defaulted debt is that it actually increases your odds of resolving a balance for a lower amount, as these Freedom Debt Relief reviews indicate

If you have a student loan, see if you qualify for a deferment, which freezes payments on your account for six months to a year depending on whether you’re eligible due to unemployment, economic hardship, in-school deferment, discretionary deferment or another type of deferment.

The best part about deferment is that Uncle Sam pays interest on your account while it’s inactive. If you don’t qualify for a deferment, then look into forbearance. However, be advised that interest will accrue while you’re not making payments.

It’s important to know what delinquent and defaulted debt are as a credit-using adult. But that doesn’t mean you need first-hand education. Only take out loans you can handle, and never let credit card balances carry over from month to month. If you do find yourself in hot water, then contact your lender immediately so you can come to an agreement before things escalate for the worst.

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3 Comments

  1. You read my mind. I need to concentrate on improving my credit. Medical bills have done me in. Thanks for posting!

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