What is Delinquency?
A young college-educated mother of two recently encountered her biggest fear. After months of sporadically throwing any funds she could spare into her student loan debt, she logged into her loan servicing account to see the word “delinquent” emblazoned in red lettering. Up until this point, she had reasoned that paying amounts smaller than her minimum payment due benefitted her more than paying nothing at all. Nonetheless, this proved insufficient in keeping her account out of delinquency. She eventually stopped making her payments altogether and ignored her creditors’ attempts to contact her. Her credit score plummeted.
Delinquency occurs when a debtor fails to make payments to a lender within the terms of their contractual agreement. Fortunately, in most cases it takes much more than failing to make a payment by its due date to escalate the debt collection process. Many lenders extend debtors a period of time to make a payment without adverse consequences. This is called a grace period. If a debtor fails to make a payment once the grace period ends, their account becomes delinquent. This often results in high fees, derogatory marks on the debtor’s credit report, and escalated debt collection attempts.
What happens to delinquent debts?
In short, the debt will not disappear. Delinquent account information remains on the debtor’s credit report for an extensive amount of time. By simply ignoring a debt, the debtor also risks being sued in court for his or her outstanding balances. There are four stages of the debt collection process following delinquency.
Stage 1: 30 Days Late
At this point, thirty days have passed since the beginning of the billing cycle, and the debtor has failed to make a sufficient payment. Many creditors report the account to credit reporting bureaus as being delinquent. However, lenders often limit debt collection attempts to friendly emails, phone calls, or letters in an effort help the debtor remedy his or her delinquency status before escalation.
Stage 2: 60 Days Late
In this stage, sixty days have passed since the beginning of the billing cycle, and the debtor still has not made a sufficient payment. Many creditors transfer the delinquent account to an internal collections department, and collection attempts become more aggressive. The debtor also receives derogatory remarks on his or her credit report. Fortunately, the debtor still has the opportunity to work with the lender to settle the account and avoid third-party debt collection or legal action.
Stage 3: 90 Days Late
Now ninety days have passed since the beginning of the billing cycle, and the debtor has missed another payment due date. Debt communications become more frequent and aggressive. The account balance increases with additional late fees and interest. The debtor may be able to salvage the account, but he or she must contact the creditor to negotiate a payment plan.
Stage 4: Charge-off Status
After numerous failed attempts to collect the debt, the creditor writes it off. In most cases, the creditor forwards the account to a third-party debt collection agency and reports this to the credit reporting bureaus. The debtor receives communications from the third-party debt collector. These communications must comply with the Fair Debt Collections Practices Act. The debtor should request verification of the debt prior to submitting a payment to the third-party collector.
Don’t ignore delinquent debts.
Once a delinquent debt reaches charge-off status, the debtor becomes vulnerable to a lawsuit. The best course of action is to try to work with the lender or collector to set up a manageable payment plan. True, derogatory remarks associated with delinquent debt remain on the debtor’s credit report for a period of time, but paying off the debt eliminates the risk of a court judgment. Judgments can result in wage garnishment and lost assets. In summary, take immediate action to address debt delinquency before it escalates.