When you’ve fallen behind in your scheduled payments to a lender, you will usually receive a letter of default. This isn’t the same thing as a reminder. Getting behind on an account by a few days isn’t the same as missing payments altogether. A reminder that you payment is due, usually with a late fee added, isn’t as serious as an account that has gone into default.
Defaulting on a loan means that you’ve not lived up to your end of the agreement. By the time your creditor has sent this letter, it has been reported to the credit bureau and is now on your credit report as a negative mark.
What should you do about a Letter of Default?
Make arrangements as quickly as you can to bring your loan back up to terms. If you’re in a financial situation, such as having recently lost your job or been hurt and are now on medical leave, get in touch with your creditors to let them know what’s going on. Find out if there is an insurance provision with your loan that can cover payments in serious situations. Many times there are.
If you don’t qualify for this sort of help, however, but are still unable to meet your financial obligations, contact your creditor and see if a smaller amount can be paid until the original amount has been satisfied. Staying in touch with a creditor is vitally important. Maintaining the new agreement, even at a lesser monthly payment than was originally settled, will continue to keep you in good stead with this creditor.
Getting in over your head by having too many creditors may necessitate contacting a credit consolidation firm, who will gather your bills together and turn several payments into one, smaller payment. This may make your situation manageable. You will still be obligated to pay off the loans, but it will be within your reach to do so.
Negative Effect on Your Credit Rating
Having a credit account in default will hurt your credit. You are not legally allowed to erase this from your credit report without contacting the creditor.
Negative credit stays on your file for at least six years, making it difficult for you to obtain credit elsewhere. The best thing you can do is make arrangements to repay what you owe. If you keep to your arrangements for at least six months, you may ask the creditor to let you take the default off your credit. They may agree to this.
In order to do this, get a copy of your credit report. Then, challenge the poor mark on your credit. The credit bureau will send a letter to the creditor letting them know what you’re doing. They have 30 days to supply proof that the account is in poor standing. If they don’t return this information, then the negative mark is removed from your credit.
It’s best to pay what you owe the creditor in full, rather than making a settlement on the account. Not paying the full amount of your obligation shows a weakness of character and trustworthiness. Future creditors are not going to want to risk granting credit to you that you may not fully repay. In addition to this, the original creditor is going to be much more willing to allow the negative remark to be removed from your credit if you’ve paid them in full.
What happens if you do nothing?
Not answering this letter will only hurt your credit further. Depending on how serious the debt is, the agency has the right to take legal action. You may be taken to court and ordered to pay the amount plus court fees. It is very unlikely that you will have to serve jail time; however, on top of the default on your credit report, you will also have a judgment. This is very negative and makes you a high risk to future creditors.
