Banking Category Banking: the easy, simple banking guide

What Happens to Unpaid Debt?

A loan or credit agreement is a contract between you and your lender.

The lender agrees to give you the money, and you agree to pay it back over a period of time.

However, sometimes people cannot pay back their loans, and they default on their credit agreements. Several different things can happen, depending on the type of agreement that was in place.


Unpaid debts can have some negative consequences.

For example, if you are unable to pay your mortgage, the result can be foreclosure and the loss of your home. Once the foreclosure proceedings have concluded, the mortgage company still has the right to sue you for breach of contract.

Unpaid loans and credit cards have a negative effect on your credit score. Missed and late payments are noted. If the account is passed to collections and still remains unpaid, it can remain on your credit report for up seven years. This can make obtaining future credit difficult.

Lender Consequences

Unpaid debt holds consequences for the lender.

If the debt is not recovered via collections, lawyers or other methods, then it is listed as bad debt. Most companies have contingency funds for bad debts or questionable accounts.

Although most companies cover their bad debts with these funds, the bad debts still are listed on their annual reports. Companies might tighten credit requirements or raise interest rates to recover the money lost from accumulated bad debts.


If you owe old, unpaid debt, then whether you pay it back is something to consider. Most states have statutes of limitation on debts. Once this period has passed, you cannot be sued in court for non-payment of debt.

You need to be very careful in this situation. Some companies have tried misleading people into paying some of their old debts, by threatening to sue. If you pay even small portion of your old debt, it could reset the statute of limitations and make the old debt new again. Know your state's statue of limitations, and get advice from a consumer attorney, before taking any action.


There are alternatives to sitting with unpaid debt. If you are still within the statute of limitations on your debt but unable to pay the full amount, debt settlement might be an option for you. Calculate how much you can afford to pay in a lump sum and offer it to the creditor. Many times creditors will settle the debt for as little as 60 per cent of what you owe.

Once you have paid the agreed amount you can ask that your credit report reflect that the debt has been settled.

It might still remain on the report but will show as having been paid. This will cause far less damage to your credit score than leaving it unpaid.


The effects of unpaid debt generally stay on your credit report for seven years. Once the statute of limitations runs out, there is very little that lenders can do. However, in the meantime your life can become quite difficult.

Bad debt lowers your credit score, and this can have several secondary effects. You might have trouble renting a place to live, because many landlords make credit checks before offering a rental contract.

Your insurance rates can also be affected.

Insurance companies look at your credit scores to calculate their risk. The lower your score, the higher your rates.

Finally, an unpaid debt can affect your chances of getting a job or promotion. A notation of unpaid debt looks very unfavourable and can make a company decide against hiring you.