I Can't Pay My Credit Cards - What Happens Next?
Reader question: "I am faced with some tough financial choices right now, and one of them involves ignoring my credit card balances. I just can't pay those bills with everything else that is going on. 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 don't pay an unsecured debt. And I can sum up the usual scenario with the following statements:
- You would damage your credit score. This much is certain.
- Your overdue account would probably be sent to a collection agency for further action.
- You might even be sued by the credit card company in state court, though this is less common.
- If the creditor sues you and wins, they might be allowed to garnish your wages.
- The creditor might be willing to set up a reduced payment plan for you, or some other form of "settlement."
This is generally what happens when you can't pay the debts that you owe. Now let's talk about how each of these things might transpire, in the event that you stop paying your bills.
How a "Can't Pay" Situation Arises
Let's say the current balance on my credit card is around $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't pay my credit card bills anymore. 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 of the personal finance experts will tell you to hang onto your house at all costs, even if it means you can't make your credit card payments for a while. I generally 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 with our hypothetical scenario. After much deliberation, I decide not to pay my credit card debt so I can continue making my mortgage payments. Money is tight, so I can't afford to pay everything right now. I have to prioritize. I have to make some tough choices. So I choose to protect the best investment I have -- my home.
What Happens if I Don't Pay?
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 be a significant decline. Why? Because under the FICO scoring model, my payment history influences my credit score more than any other factor. [Of course, if you're in a position where you can't pay your credit card balances, your FICO score might be furthest from your mind. But it needs to be mentioned.]
After a few weeks of not receiving payments from me, the card issuer will turn my account over to a debt collection agency. The collector will contact me and try to persuade me to pay the debt I owe. They might even offer to set up some kind of payment plan to help me pay off the remaining balance. The collection agency may bring up the word "settlement," which means agreeing to pay off less than what is owed.
Can the Credit Card Company Sue Me?
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 can't pay the debt I owe, the credit card company is within their legal rights to file a lawsuit against me. After all, I signed a contract with them when I obtained my card. So by failing to pay what I owe, I have breached the 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 probably go to federal court.
If a judge sides with the credit card company, he or she 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 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. By the way, you should report them to the FTC if they make such threats. It's illegal.
This is not a pretty set of circumstances, I know. But it's the truth. These are the things that can happen when you can't pay your credit card debts. I would be doing you a disservice if I tried to sugarcoat it for you.
Recommended reading: 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.