What Are the Consequences of Unpaid Debt?

Posted by Ernest Hamilton on Aug 08, 2019 11:48 AM EDT
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Kicking the can down the road means continually putting off making a tough choice or taking an important action because it's difficult. And this is the situation many Americans find themselves in when it comes to debt-pushing off what they owe month after month, promising to address at a later date. But life gets busier, debt gets deeper and the likelihood of proactively addressing it just keeps getting farther away. Does this cycle sound familiar to you?

While this is understandable, it's also a risky approach to money management. Unpaid debt ushers in a certain set of negative consequences. The longer it takes you to sort out your balances, the worse you'll experience the toll of unpaid debt.

Here are just five detrimental side effects of unpaid debt to keep in mind.

Consequence #1: Diminishing Credit

Payment history makes up the largest portion of your credit score at 35 percent. This is because lenders believe they can use your past behavior to predict your future likelihood of keeping up with payments in a timely manner. Missed payments will bring your score down in a big way. Conversely, making payments on time consistently will build up your score over time.

Consequence #2: Repossession

Repossession is a possibility if you're carrying secured debt in which you've offered up an asset-like your home, vehicle, etc.-as collateral. If you garner enough unpaid debt to default on your loan by missing payments, then your creditor may have the right to take back this property.

Unsecured credit, like credit cards and medical bills, has no collateral. Although you won't undergo repossession if your unpaid debt is unsecured, you'll still suffer major damage to your credit among other penalties.

Consequence #3: Mental & Physical Health Issues

Ask anyone who's carried debt before: It's stressful! Research has shown that debt can exacerbate mental and physical health issues for consumers. If you're spending time worrying about your unpaid debt, you can bet this state of owing money is taking a toll on your health.

This is why so many consumers express utter relief and gratitude when they finally find a debt elimination strategy that works for them. As one enrollee in a debt settlement program writes in her Freedom Debt Relief review, "[It] is such a stress relief too."

Yes, people's finances start to shape up when they find a way to tackle their debts-but as importantly, they simply feel better on a short- and long-term basis.

Consequence #4: Lack of Emergency Funds

Emergencies themselves are surprising, but the fact that they occur semi-regularly is not. Whenever people are struggling with unpaid debt-including late fees and rising interest rates-they're likely not in a position to pad their emergency savings. This leaves them highly vulnerable to whatever life throws at them next, whether it's a trip to the emergency room or a costly car repair. Having insufficient emergency funds increases the chances you'll need to rack up more debt to handle crises, adding fuel to the fire.    

Consequence #5: Inability to Get Future Credit

Carrying a record laden with late and unpaid debts makes future lenders hesitant to loan you money. This means it'll be more difficult, or next to impossible, to get a mortgage or auto loan in the future. Furthermore, if you max out your current collection of credit cards, you'll find yourself unable to open another line of credit or get a loan in a pinch-increasing the chances you'll need to file for bankruptcy.

Understanding the consequences of unpaid debt should add to your motivation to address debts productively rather than letting them bring down your quality of life.

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