Very few people go into debt intending to not repay what they owe. However, it becomes the case in some circumstances where people do not have the means to honor their financial obligations.
Others try to escape their debts to defraud their creditors. Regardless of your reasons for not settling your debt on time, legal implications exist, and many of them have long-term ramifications.
Here is what could potentially happen if you do not pay creditors what you owe them:
Decreased credit score
One of the biggest money mistakes people make is going into debt too easily, according to Personal Money Network. They will finance purchases on credit cards instead of saving up for something they want. When they do not pay the installments, the credit card company starts adding interest to an outstanding balance, which continues compounding until it is settled. The same principle applies to most debts.
Late or missed payments affect your credit score, which makes securing financing in the future a significant challenge. It takes a long time to rehabilitate a poor credit score, making it preferable to avoid this situation at all costs. However, going into debt to pay off what you owe only digs you deeper into a hole that can become impossible to escape.
Jail time
A failure to pay some debts or keep making late payments can land you in court facing potential jail time. Child support payments are part of a court order, and failing to make them will put you in violation of the law.
While courts are reluctant to incarcerate parents for not paying child support, they will do so when other options have been exhausted. Child support debt does not go away, even if someone declares themselves bankrupt.
Another debt you should pay to avoid a criminal record is income tax. Again, the IRS does not bring criminal charges and demand jail time without good cause. If you work with the organization to agree on a payment plan and stick to it, you should not face prison for income tax debt.
Loss of wages and assets
A court judgment over child support, income taxes owed, or any other debt can be deducted from your wages or salary. You could face a garnishment that pays your debt before allocating you the balance.
This could put a significant dent into your monthly budget. This strategy is usually employed by lenders that offered you unsecured financing. Student loan providers can also garnish your wages if you do not make the required repayments.
In the case of a secured loan, like a mortgage, a bank or financial institution can seize property and assets to repay the debt. Alternatively, they can repossess an asset that you have not paid for, such as a car.
To prevent situations like these, negotiate with your creditors if you run into financial trouble and cannot afford to make repayments. Creditors would prefer to get their money back from you, even if it takes longer than planned than to get nothing.
Debt collectors
When creditors have tried everything possible to get you to repay a debt, they have no alternative but to turn you over to a debt collection agency. For a percentage of each payment made, these agencies chase down clients with outstanding debts.
Debt collectors may not harass you, but they are entitled to make regular phone calls and request you to arrange a repayment plan. Having been handed over to a debt collector makes your credit score even worse. Some use questionable methods to get their money back, which could put you in danger.