Some time back, noted former investment banker and entrepreneur James Altucher suggested millennials deal with their debt woes using one simple and elegant solution: Just don’t pay them.
His suggestion that young people simply walk away from their debts was greeted by a chorus of boos. The peanut gallery seemed to think abandoning debt was the absolute worst thing a person could do — even putting aside questions of right and wrong and personal responsibility.
But is the truth somewhere in the middle? Could walking away from debt be the right decision for some people?
What Happens If You Stop Paying Your Debts?
What would happen if you did what Altucher suggested and just walked away from your debts?
Well, for starters, your credit score will take a big hit, probably to the tune of 100 points or more.
Your credit score is a function of a number of factors, but the two biggest are timely payments and the amount of available debt that you’re actively using. When you stop paying your credit card bills, you’re most definitely not making payments on time. So your credit score will suffer accordingly, depending on how many credit cards or loan accounts you’re not paying.
The other part of your credit score that’s important here is credit utilization — or the percentage of your available credit line that you’re using. If you’re carrying enough debt that you’d consider walking away from it, you’ve probably got a pretty high utilization ratio already — and if you stop paying on that debt, it’s certainly not going down. In fact, between late fees and interest, it will keep edging upward, which is not going to help your credit score.
These are the two immediate effects on your credit. However, there are other problems you might run into that will affect your credit report, your credit score, and your day-to-day life.
After a certain period of time, usually around 90 days, your credit card companies will do what is called a “charge off.” This is when they sell the debt to another, third-party company. In short, the debt is sold to a debt collector for pennies on the dollar.
Now you’re going to have a delinquent account appear on your credit report, and that’s going to be another big hit on your credit score. The good news is, by this point, most of the damage is done.
Probably. The other thing you might or might not have on your credit score and life is a lawsuit. Your creditors might haul you into court to try and claim their money. Your debt then moves from one category (probably an open account) to another (a judgment). That new category usually sticks around haunting your credit report for a lot longer than the old one, so that’s something to consider when you walk away from debt.
But here’s the thing: Notice how many times the word “might” was used in the last paragraph? That’s because collection agencies aren’t going to sue over every single debt. They wouldn’t make any money that way. Often times, it costs more to collect a debt than the debt is actually worth. Even though collection agencies pay pennies on the dollar for their debts, they still need to turn a profit on that. The amount that a collection agency will sue for varies from one company to another, but is generally at least a few thousand dollars.
Even if you do get sued, if you show up in court to challenge the debt, you might win. The collection agency has to prove they legally own the debt, that the debt is in the amount they say that it’s in, and that the debt is still legally collectible. Even if all of these facts are on the debt collector’s side, they have to prove it — and many times, they cannot.
Of course, during the time period when the debt is legally collectible — and often times long afterward — you’ll have to deal with phone calls to your home and place of business, as well as letters and other harassing attempts to collect the debt. For many people, that’s enough to keep them paying their bills on time.
And to be clear, we generally recommend people buckle down and create a disciplined debt repayment plan – not just walk away from their balances. If you don’t address the spending issues that got you into debt in the first place, it won’t be a permanent solution. And beyond the personal responsibility aspect, there are simply too many huge benefits to having a good credit rating.
A bad credit score can make it harder or even impossible to finance a car, get a mortgage, or rent an apartment — it can even cost you your dream job. You don’t want to throw that away for a few nights out at a restaurant or a new leather jacket.
However, if you’re in over your head and looking at bankruptcy, walking away from your debts could make sense if you’re not morally opposed to it. It’s certainly not going to be any worse than bankruptcy.
Related Articles:
- Expose a Fake Debt Collector by Asking These Three Questions
- What Is a Good Credit Score?
- Seven Things to Know When Filing for Bankruptcy
- How to Get Out of Debt Without Credit Counseling
The post Could You Walk Away From Your Debt? appeared first on The Simple Dollar.
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