Risks Of Unpaid Debts

by Kate on September 22, 2014

in Advice From Partners

Unpaid debt can be a huge problem. Those who are struggling to repay what they owe might understandably be worried about what will happen. It is important, therefore, to understand just what the risks associated with unpaid debt are and how they can best be managed.


What Could Happen If Debt Remains Unpaid?

The first, simplest, and most obvious risk associated with unpaid debt as that the amount of money you owe will increase. If you defer payments, you will accrue more interest and other charges may be added to what you owe. If your debt remains unpaid for some time, it can increase significantly, and you could find yourself owing much more than you originally borrowed or expected to repay.

Another risk is the effect that it can have on your credit score. Unpaid debts and deferred payments will form a significant black mark on your credit report, and this will count against you if you ever need to seek finance in the future. This may prevent you from obtaining a mortgage, taking out a credit card, buying a car on finance or, in extreme cases, even doing simple things such as taking out a mobile phone contract.

If you persistently fail to meet repayments on a debt, the lender may seek to take action against you. At first, this will likely take the form of letters, phone calls and, potentially, even in-person visits demanding payment. If the money is still not forthcoming, this may be followed by a County Court Judgement (CCJ). This will increase the impact that your debt is having on your credit score and empower the lender to take further, potentially more drastic, action against you. For example, after a CCJ has been obtained a lender may be able to send bailiffs to seize property from you in order to repay the debt. Almost any type of property could be seized for this purpose, though they are required to leave you with certain necessities.

Ways to Manage Unpaid Debt
One step you may wish to take is to contact your creditors and explain your situation. They may be understanding and willing to make allowances, especially if your ability to repay has been affected by circumstances beyond your control such as ill health or redundancy. Potentially, lenders may be willing to renegotiate an agreement to make it more manageable, or at least hold off on taking further action such as seeking a CCJ.

Many people choose to take out debt consolidation loans in order to make their situation more manageable. This involves taking out a single new loan which can be used to pay off their previous unpaid debts and start again. The new loan will involve a single repayment, with a new agreement to make the situation more manageable than the one you are currently facing. Often the situation will also be simpler because you have only a single payment to make rather than multiple creditors to manage.

Certain types of debt consolidation loans such as homeowner loans from Evolution Money offer more manageable rates but secure the debt against an asset. Before considering this type of loan, be aware that although the rates can be attractive, you are putting the asset in question at risk and this is not something you should do lightly.

Alternatively, simple prioritisation can help to improve your situation and mitigate risks. Make a list of all your creditors, including key information such as interest rates, the amount you owe and how long the debt has remained unpaid. Decide which should be your priority, such as those with the highest interest rates or where payment is most severely overdue, and focus on paying those debts off first. Wherever possible, try to meet the minimum repayment on all your debts. If you are able, paying more than the minimum will be cheaper in the long run, as less interest will accrue before the debt is cleared.

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