What Happens If You Do Not Pay the Credit Card Debts You Owe?

Reader Question: I am faced with some financial choices right now, and one of them involves ignoring my credit card balances. What happens if I do not pay the credit card debts I owe? I guess I should ask, what's the worst that could happen to me?

It depends on what your credit card company decides to do. All I can do is tell you what usually happens when you do not pay your unsecured debt. And I can sum up the usual scenario with the following statements:

1. You would damage your credit score. This much is certain.
   
2. Your overdue account would probably be sent to a collection agency for further action.
3. You might even be sued by the credit card company in state court, though this is less common.
   

This is generally what happens if you do not pay the credit debts that you owe. Now let's talk about how each of these things might transpire, in the event that you paying your bills.

Let's say that the current balance on my credit card is $6,000. As I was building up this balance over the years, I never had any trouble making the minimum payment. But then I lose my job and run into some unexpected medical costs. Because of these and other unfortunate events, I find that I can no longer pay toward my credit card debt. I can barely make my mortgage payment, but I'm hanging in there with that.

This is a common scenario a lot of folks are facing right now. Most experts within the personal finance industry will tell you to hang on to your house at all costs, even if it means you can't make your credit card payments for a while. I usually agree with that advice. For most people, their home is their best investment. So you should protect that investment at all costs.

So let's continue our hypothetical scenario. After much deliberation, I decide not to pay my credit card debt so that I can continue making my mortgage payment. Money is tight, and I can't afford to pay everything right now. So I choose to protect the best investment I have -- my home.

So what happens to me if I do not pay my credit card debt?

At first, I will start to receive late notices from my card company. They will probably add on some penalty fees as well, so I now owe them even more money. This is where things often tend to snowball out of control. If I continue not to pay my credit card debt, I will accumulate more fees. They might even increase my interest rate, which jacks up my balance even more.

At some point during all of this, they will report my late payments to the three credit reporting agencies (Experian, TransUnion and Equifax). This will damage my credit score, and it could drop it significantly. Why? Because under the FICO scoring model, my history of payments influences my credit score more than any other factor.

After a few weeks of not receiving payment, the credit card company will turn my account over to a debt collection agency. They will contact me and try to persuade me to pay the debt that I owe, and they might even offer to set up some kind of payment plan to help me pay it off. The collection agency may bring up the word "settlement," which means agreeing to pay off less than what is owed.

What happens next depends on (A) the amount of money I owe and (B) the internal policies of the credit card company. They will either leave the account in the collection agency's hands, or they will take me to court.

Yes, I said court. If I do not pay the debt the debt I owe, the credit card company is well within their legal rights to bring a lawsuit against me. After all, I signed a contract with them when I obtained my credit card, and my failure to pay what I owe is a breach of that contract. The suit would be tried in state court -- unless I brought a counter-suit against card issuer for some violation of the Fair Debt Collection Practices Act, in which case the trial would go to federal court.

If a judge sides with the credit card company, then I will receive a negative judgment against me. This will also show up on my credit report (in the "Public Records" section), and it will lower my score even more. The judge would decide how to compensate the card issuer for the amount owed. They might garnish my wages, or they might put a lien on my house. It's important to note, however, that a credit card company cannot go after my wages or my other assets unless it's ordered by a court of law. So keep this in mind when the collection agencies start threatening you, which is a common tactic.

It's not a pretty set of circumstances, I know. But it's the truth. This is what could happen if you do not pay your credit card debt.

Related Q&A sessions:

• Settling Debt When You Cannot Pay Your Bills
• Can a Credit Card Company Take My House?
• Can the Company Sue Me in Court?
  

You might also want to read through the Fair Debt Collection Practices Act (FDCPA) that I mentioned earlier. It explains the rights and protections you have when bill collectors start contacting you. You can find a summary of your rights under this act in this section of the FTC's website.