What to Do if You Can’t Repay Your Debt Consolidation Loan

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Claire Matthews

Financial Advisor, DCL

What to Do if You Can’t Repay Your Debt Consolidation Loan

Some people may find it challenging to make their debt consolidation loan repayments on time, whether it is because they aren’t budgeting correctly or because they are faced with unexpected medical bills or other expenses. Defaulting on a debt consolidation loan can be extremely damaging to your finances, but there are actions you can take to prevent court proceedings due to non-payment of your loan.

The Consequence of Late Payments

Making one late payment on a debt consolidation loan will have negative consequences. You will not only be charged a late fee, but you the interest rate on your loan will increase, which will also increase your monthly payment amount. This is how many borrowers begin to find it difficult to keep up with their monthly payments.

Contact Your Lender

The first thing you should do if you are having difficulty making your payments is to contact the lender. You should contact them before your payment is considered late. They may allow a grace period or work with you to waive the late fee or the increase in interest rate. Conversely, they may not negotiate with you at all, but it doesn’t hurt to try.

Defaulting on a Debt Consolidation Loan

Defaulting on a loan is a serious situation. You will be charged late fees, and the lender will most likely increase your interest rate (this will be stated in the loan agreement – another reason to read the fine print carefully).

Many lenders may allow a 15- or 30-day grace period for a late payment, but some may not have any grace period at all. If you go 60 days without making a payment, you will be charged additional fees and an interest rate increase with most debt consolidation loans. After 90 days, your account will officially be in default and you may begin to get phone calls from the lender.

What to Expect if Your Account is in Collections

If you still have not contacted the lender or made a payment after 120 days, the lender will send your account over to a collections department or agency to retrieve the amount due. You will be getting multiple phone calls about your default once your account is passed over to a collections agency. If you do not reach an agreement or begin to pay back some of the loan, your account will then be turned over to a collections lawyer.

Keep making payments for as much as you can even if your loan is in default.  If the lender is receiving some money from you, they may be willing to work with you and prevent your loan from officially falling in to default status.

If you are taken to court due to non-payment of a loan, you will not only have to repay the loan amount, but you will also be charged with all associated court costs. The court can also put a lien on your house, which means you are responsible for some or all of the debt if you sell your house, or they may garnish up to 25% of your wages.

If you cannot pay your loan and you are in danger of missing your monthly payment, you should contact the lender as soon as possible to see if they will allow you to make a late payment. Even if your account is with a collections agency, you can still negotiate with them and make a new payment plan that you can afford. Although you will be paying a significant amount of interest, it will still be cheaper than going to court and incurring those additional costs.

Reduce Your Expenses

If you haven’t already done so, you will want to closely examine your finances to determine where you can make some quick reductions so you can catch up on your debt consolidation loan payments. If you are in a situation where you can’t repay your debt consolidation loan, you will have to seriously consider adjusting your lifestyle until you can afford to live solely off your income without using credit cards.

If you make some sacrifices, you can cut down on your expenses and put the extra money toward reducing your debt. You may have to downsize your lifestyle or cut back on amusement or entertainment activities, but cutting back will allow you to put more money toward your debts, or allow you to build up a savings so you can stay current on your loan payments even when faced with unexpected expenses.

There are some immediate cuts you can make in order to have more money to put toward catching up on your loan payments. You may need to cut out that planned vacation or stop eating out at restaurants, but you can reduce your expenses significantly if you are dedicated to resolving your financial situation.

Increase Your Income

Get a second job right now to increase your income. It’s not as difficult as it may seem, and there are endless opportunities for part-time or online work that can put more money in your pocket. Perhaps you can offer lawn care, child care or dog-walking services. Maybe you can work a few hours driving for Uber or a similar company, or for an online freelance writing service such as Upwork. If you do a little research, you can find something you can fit into your schedule, and it may allow you some flexibility in the options you can consider if you can put the extra money toward your debt to reduce your balance or become current with your payments.

If you find something that works with your schedule, you can quickly catch up on missed payments if you put your extra income toward paying down your debt consolidation loan. In addition, increasing your income and reducing your expenses together will allow you to put a significant amount of money toward catching up on your loan payments. You may find it is easier than you thought to get some financial stability.

Consider a Debt Settlement Plan

If your debt consolidation loan is in default, you may want to consider a debt settlement organization to help you resolve your financial issues. There are multiple non-profit organizations who offer credit counseling and debt management services, and they may be able to help you avoid going to court for non-payment of your loan by negotiating with your debt consolidation lender. Keep in mind that if you negotiate your debts through a debt settlement agency, they will charge you a negotiation fee, and you may have to claim any reduction in your debt as income.

Although a debt settlement does have some negative consequences, it is a better option than filing for bankruptcy, because it will not have the lasting effect on your credit score.

File for Bankruptcy

A bankruptcy is an extreme step, and it should only be considered as a last resort to eliminate your debts. While it does have some advantages, it will also have a significant damaging effect on your credit score, and it is a matter of public record, which may cause issues depending on your occupation, and not only that, some people find it extremely embarrassing. It is understandable that you may not feel great about filing for bankruptcy, but you shouldn’t be embarrassed. Many people have struggled with credit card debt and medical bills, and sometimes bankruptcy is the only option to revive your financial situation.

There are two different types of bankruptcies: Chapter 7 and Chapter 13. If you own a business or have multiple assets other than the typical house or car, then you may consider Chapter 13 bankruptcy. Business debts would only be considered in a Chapter 13 bankruptcy so unless you own a large business or corporation, you probably wouldn’t want to consider this option. Although a bankruptcy does allow you to eliminate your debts, it does have some negative consequences as well.

Chapter 7 Bankruptcy

A Chapter 7 bankruptcy will only include consumer debts such as credit cards, medical bills and personal loans. If your income is less than the median income in your state, you will most likely be approved for a Chapter 7 bankruptcy. If your income is above the state median, you may still file, but you will have to calculate if you have enough to repay some of your debt on your own.

Unsecured consumer debts may be included in a Chapter 7 bankruptcy, such as credit card debts, medical bills or cash advance or payday loans. There are strict regulations that will determine what debts you can and cannot include in a bankruptcy but at the same time, there may be some flexibility with which assets you may keep or must forfeit. If you need your car for transportation, you may be able to keep it, but if you want to eliminate that debt, you will have to surrender the car.

. Disposable income is the amount of money you have left over after paying for necessities such as food and transportation. The court will analyze your disposable income to determine if you should be using more money to repay your debts. The lower your disposable income, the greather the chance you have of qualifying for a bankruptcy.

There are some debts that cannot be included in a bankruptcy such as federal student loans and child support or alimony. If you have any debts due to criminal behavior or other court-related charges for causing injury or death, those cannot be included as debts in a bankruptcy.  Advantages of Filing for Bankruptcy

When you file for Chapter 7 bankruptcy, you are provided the protection of an automatic stay. An automatic stay legally prohibits creditors or collection agencies from contacting you to retrieve the money you owe, in addition to preventing them from garnishing your wages or suing you for non-payment.

Filing for bankruptcy is a serious legal matter that should be carefully considered. If you decide this is the best option for you, be sure to have a plan for living after bankruptcy. This will include living off your income alone, without the use of any credit cards. It is important to avoid falling back into debt, because you definitely don’t want to end up back in debt or defaulting on loans.

Disadvantages of Filing for Bankruptcy

Filing for bankruptcy will cause significant damage to your credit score, and it will remain on your credit report for at least 7 and possibly up to 10 years. Of course, if you in a severe financial situation or have defaulted on a debt consolidation loan, you may already have bad or poor credit. A bankruptcy shows lenders that you are extremely high-risk and you have had difficulty managing your finances in the past. This can make it difficult to be approved for an apartment or a car loan, so be sure to consider this before you file for bankruptcy.

You may want to check with your employer to determine if filing for bankruptcy will affect your employment status. If you are involved in finances or accounting or some other occupations, a bankruptcy could cost you your job. Decide What Is Best for Your Situation

A credit counselor is a great resource that can help you determine what to do if you can’t repay your debt consolidation loan, but you should already have an idea of the status of your finances. While it may be easier to use a debt settlement plan or file for bankruptcy, both of these options will have a negative effect on your credit score.

If you are dedicated to reducing your expenses and increasing your income, you can overcome your debt on your own and become current on your debt consolidation loan payments. In fact, you may have enough money left over to put an additional amount toward your loan so you can repay it faster, thus saving yourself on interest rate charges. Some may be too deep in default to overcome it on their own, and there are options for those situations as well.

Claire Matthews

Claire Matthews

Financial Advisor, DCL

Claire is a noted financial writer and author of hundreds of articles about personal and business finance. Before getting her MBA, she graduated with a BS in Economics. Her coursework focused on the different ways that debt, debt structure, and debt restructuring affect micro and macro-economic issues.

Upon graduation, she took a job at an investment bank that worked with municipal and county governments to help them reorganize and structure their debt so they could continue to provide essential city services.

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