As the coronavirus pandemic continues to wreak havoc around the world, governments have instituted different public health measures in the form of social distancing and lockdowns as a means of physically disrupting the contagion and slowing down its spread. In doing so, these measures have also slowed down the flow of goods, putting economies on hold and contributing to a global recession. The economic contagion is now spreading almost as fast as the virus itself.
Such a scenario didn’t seem plausible a mere month ago. But because politicians and policymakers simply looked on during the early stages of the spread, when the economic costs of social distancing would have been far smaller, today these costs have ballooned in size. What’s even worse, the path we are currently on is nearly impossible to predict, aside from expecting negative growth. Over the last several months, millions of people in the United States have lost their jobs due to the coronavirus pandemic.
In April alone, the unemployment rate reached 16%, with over 26 million people filing for unemployment insurance. If an additional 10 million Americans are left without a job in May, the unemployment rate could reach as high as 22%. While this figure is below the 24.9% maximum reached in 1933, during the Great Depression, it’s also important to remember that a third of all working-age Americans today are not classified as employed or unemployed. This group is made up of students, early retirement folks, and homemakers. What this means is that by the end of May, less than half of the American workforce will actually be earning a wage.
The economic effects generated as a result of this huge spike in job losses could be enormous. Consumer spending makes up around 70% of the country’s entire GDP, and during the second quarter of 2020, this spending could fall as much as 40%.
During these periods of economic hardship and severe adversity, people need to be able to make the most objective and calculated moves when it comes to their financial situation. Like many other Americans, you are probably finding it increasingly difficult to make your monthly credit card payments and are afraid of defaulting on your debt. If you are still among the fortunate ones who are in good shape financially, this is the time to pay down your debt as there is a strong chance that your current economic security may not last. As uncertain as things are now, the effect of the ongoing economic crisis is bound to affect everyone in one way or another.
With that said, it’s important for everyone, regardless of their financial situation, to not default on their credit card debt without having a solid plan put in place. This guide will walk you through the steps of what to do if you find yourself on the verge of defaulting on your credit card debt.
What Is Debt Default?
Before we can go into any details, we need to look at what debt default is. To put it simply, default is the failure to repay a debt, which includes the interest or principal, be it on a loan or security. A default takes place when a borrower, such as an individual or a business, is unable to make payments for a given period of time. A default can happen on both secured and unsecured debt. A secured debt is backed up by collateral as a means of reducing the risk associated with lending. One of the most common examples of secured debt is a mortgage. In this case, if the borrower is unable to make the payments, the bank will seize the house, sell it, and use the proceeds to pay back the debt. An auto loan is another example of secured debt.
Unsecured debt, on the other hand, is debt that’s not guaranteed by any type of collateral. Credit card bills, medical bills, utility bills, payday loans, personal loans, as well as some retail installment contracts fall within this category. Basically, if you default on an unsecured debt, your creditor cannot directly recuperate their losses by seizing your assets and/or possessions. Contrary to what some people believe, defaulting on an unsecured debt doesn’t mean that you are off the hook. You will still be responsible for that debt, but it will be more difficult for the creditor to get their money back. For this reason, interest rates on unsecured loans tend to be higher than with secured debt.
Defaulting on Unsecured Debt
Unsecured loans are typically issued based on the consumer’s credit rating. In other words, the better your credit score, the higher the chance that you will actually repay. Therefore, you will also be able to get a better deal in terms of the loan itself, as well as the interest rates. When it comes to credit card debt, banks and other financial institutions demand at the very least, minimum payments be paid. Typically these only cover interest, so your balance doesn’t go down. However, if payments cease to be paid, the bank considers that you are not able to make your payments and will usually charge off your account. In other words, they take a loss on the account. Creditors also have the legal option to sue you if you’ve stopped paying. However, this is a costly procedure, and the majority of lenders will not do this, except in the case of significant debt.
What they will do instead is to report you to the three major credit bureaus (Equifax, Experian, and TransUnion) and turn your account over to a debt collection agency. In the majority of cases, it’s these collection agencies that will try to reach a settlement or issue a lawsuit against you. If the court ruling or judgment lien will rule in the debt collector’s favor, they will have the right to take possession of your property, have your bank accounts frozen, or your wages garnished until your debt is paid in full. Based on the statute of limitations, creditors and collection agencies have a certain amount of time before they can no longer take legal action against you, but reaching the SOL takes years, and should not be considered a plan of action.
How to Handle Credit Card Debt Default
Some people look at debt default as a means of getting out of making monthly payments. Yet, of all the bad things that can happen to your credit report, defaulting on your debt will have an impact. In addition, debt collectors will still be able to take you to court, which can lead to wage garnishment or having your possessions sold off. So, if you find yourself struggling with your credit card payments, hiring professionals is highly recommended.
Filing for bankruptcy is also an option when it comes to dealing with credit card default. And even though this move will keep debt collectors at bay, it should be considered as a last resort measure and should only be used when you’re dealing with severe debt and have no other means of making even reduced payments to a debt settlement program. Keep in mind that your creditor can still take any proceeds from your assets and property as a means of paying off your debt through a court mandated restructuring, and the bankruptcy will appear on your credit report for up to 10 years.
Settle Your Credit Card Debt
There’s also an additional option for handling your credit card debt default. If you are unable to pay off your debt in full, you don’t need to go straight to bankruptcy or ignore your debt completely. You can also choose to negotiate a settlement for your debt. In most cases, this is the best compromise that you can make. You can try to do this on your own, or you can work with a professional debt relief company that has your interests at heart and will negotiate on your behalf.
Contacting such a debt relief company the moment you realize that you’re heading towards default is critical. In most cases, you will be able to avoid a lawsuit when a third party talks with your creditor and seeks a settlement. It’s important to note that a lawsuit will also tend to end in a settlement, but best to avoid them when possible.
Debt settlement is a process of resolving an outstanding debt by promising the creditor either a one-time payment or a multi-payment plan for a smaller sum than what was originally owed. This sum will be somewhere in the range of 10 to 75% of the original debt and needs to be accepted by both parties before it can go into effect. In addition, a debt settlement will also affect your overall credit score, but not to the same extent as filing for bankruptcy, and it will recover once the debt is eradicated.
Settle Your Credit Card Debt With a Debt Management Plan
In order for the creditor to accept your settlement, they need to get some assurance that you will actually be able to pay the settlement amount. One way of doing this is through debt management. In simple terms, debt management is a reorganization of the debtor’s expenses and lifestyle in such a way that the debt will be repaid as soon as possible. When a debt relief company is involved, they will help you put money aside over a certain period of time. They will start the debt negotiation process once they believe that there is enough to offer a settlement to your creditor. In the majority of cases, this will involve a so-called Debt Management Plan (DMP).
The first phase of the process is to assess your current financial situation. This will include both your income and expenses in an attempt at figuring out where you can redirect money towards paying off your debt. In some cases, this may also include closing any other currently active credit cards as a means of keeping additional debt from accumulating during this time. Your debt relief counselors will then reach out to your creditors to negotiate the terms. These can include everything from lowering your interest rates, your monthly payments, and the total amount you owe.
Keep in mind that this may not be a one-time thing, and more than one round of negotiations will be needed before you can reach a settlement. But once an agreement has been reached, the DMP will go into effect, and you can start paying off your debt. It is, nevertheless, essential that you stick to the agreed-upon terms and conditions of the plan and make your payments on a regular basis.
By taking the debt management approach, you will not only be able to negotiate lower interest rates, fees, and principal sums, but you will also be able to put an end to the endless barrage of calls from your creditors or debt collectors. What’s more, a DMP is a much more discrete process of paying off your debt that doesn’t involve a lawsuit or a public record, which is what happens when you file for bankruptcy.
Most economic contractions tend to be the end of a boom cycle inherent to the capitalist system. This is a time to “tighten your belt” and reign in spending as debt catches up with people during these times. Occasionally, however, instead of a cyclical contraction, we are faced with a full-blown economic crisis. This was the case with the 2008 Financial Crisis, but this time around (for different reasons), it’s important to make the right decisions in the face of severe adversity. The emotions that tie into a sudden economic meltdown can be overwhelming. For that reason, it is best to leave critical financial planning and changes to experienced professionals who handle these situations for a living.
Churchill Credit Solutions will provide you with expert advice to help you or your businesses avoid defaulting on your debt and secure your financial future. Our team of financial and legal advisors will help you pay off your credit and get out of debt quickly. We will also support you when it comes to legal actions and the unfair and often abusive debt collection practices of creditors and debt collectors. So, instead of struggling with defaulting on your debt, you can request free counseling. Let’s find out if there is a solution that can help you get out of debt in the most efficient way possible.