What Does it Mean to Default in a Debt?

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Defaulting on a debt means you aren't repaying your obligation as agreed. If you stop making payments on a credit card or loan, you'll go into default. When you've gone into default, the creditor assumes you have no intentions of paying the money you owe. The debt is written off as a loss by the creditor, but you're not off the hook. You still legally owe the debt and your credit score will suffer. The negative activity remains on your credit report for seven years, and in some cases longer.

Credit Cards

Default doesn't happen after just one missed or late payment. You'll have some time before the creditor considers the debt in default. Credit card companies typically charge-off a debt once you've gone 180 days without a payment. After a charge-off, the credit card company generally sells the debt to a third-party collection agency. If you decide you want to pay off the debt, you'll need to contact the debt collector instead of the original creditor to make any payment arrangements.

Car Loans

A car loan generally goes into default after 90 to 120 days of non-payment or underpayment. Once in default, the creditor can legally repossess the car. It can sell the car in an effort to recoup some of its loss. You'll be responsible for repaying the difference between the sale price and the balance you owed on the loan, plus any fees. Before defaulting on a car loan, you may want to consider refinancing to lower the monthly payments.

Federal Student Loans

After one missed federal student loan payment, the debt is delinquent. If you go 270 days without a payment, the loan enters default status. In addition to the credit consequences associated with default, you'll also face borrowing limits. You won't be entitled to any federal financial aid until your loans are out of default. You also won't be eligible for a deferment or forbearance. Since it's a federal debt, you can face tax offsets and wage garnishments until the debt is repaid. Fortunately, there are options out of default, including federal consolidation loans and the rehabilitation program.

Private Student Loans

Unlike federal loans, personal loans have a shorter grace period before entering default. Although federal student loan default is defined by law, private loans define default in the loan contract. Generally, after about 120 days without a payment, a private student loan typically is considered in default. If you default on a private student loan, it'll have a negative impact on your credit report just like defaulted federal loans and other charge-offs. The creditor can sue, but they'll have to win and obtain a judgment from the court before they can use any collection tools like wage garnishments.

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