Defaulting on a Loan or Credit Card |
By Sybria White on November 19, 2010
.jpg.aspx) With the economic downturn showing little signs of improvement, defaulting on home loans, student loans and credit card debt is becoming more of a realization. With the unemployment rate so high and other economic demands growing, paying back debt is increasingly more difficult. Despite these obstacles, the consequences for defaulting on loans or credit card debt are very serious and unforgiving. This article will explain what defaulting means and how to avoid defaulting on debts.
Definition of Default
Defaulting on a loan or credit card debt occurs when a debtor fails to make required debt payments on a timely basis or to comply with other conditions of an obligation or agreement.1
Student Loans Default
In recent years the default rate for student loans has increased significantly. The U.S. Secretary of Education Arne Duncan announced earlier this year, that “the FY 2008 national cohort default rate is 7.0 percent, up from the FY 2007 rate of 6.7 percent”2. This may not seem like much of an increase, but the rate has not been this high since 19973. With that being said, many students risk facing student loan default. Each student loan has its own rules regarding default. However, for federal student loans “if you do not make any payments on your federal student loans for 270-360 days and do not make special arrangements with your lender to get a deferment or forbearance, your loans will be in default”4.
Some of the consequences from defaulting this type of loan include, but not limited to: garnished wages, interception of your federal and state income tax refunds, the federal government may withhold part of your Social Security benefit payments, and you may not be able to renew a professional license you hold4.
Credit Card Loan Default
Credit card default typically occurs after the creditor fails to receive payments following a designated grace period. Similarly to student loans, defaulted credit card payments come with serious consequences. The company is allowed to sue debtors for the debt they owe. Default on a credit card will also scar your credit report for up to 10 years5. Although these consequences sound harsh, the lengths credit card companies are very limited thanks to legislation like The Federal Trade Commission Act and the Truth in Lending Act5.
Prevention
With either type of loan default, the key to avoiding default is prevention. If possible, borrow as little money as possible. It is also advisable to communicate with your lender when you think anything is going to impact your repayment. Often times, simple communication can be a solution to avoiding loan default.
Sources:
1 http://www.investorwords.com/1350/default.html
2 http://www.ed.gov/news/press-releases/student-loan-default-rates-increase-0
3 http://money.cnn.com/2010/09/13/pf/college/student_loan_default_rate/index.html
4 http://www.finaid.org/loans/default.phtml
5 http://www.ehow.com/about_4912083_credit-card-default-laws-regulations.html
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