Normally, people who can’t pay their loans declare bankruptcy, which is basically an acknowledgment that you are incapable of recovering from your debt. If you’re really in over your head, sometimes bankruptcy can be the only option, but it’s generally a last resort – your debts are forgiven, but your credit score takes a massive hit. And with a low credit score, it’ll be a lot harder for you to get loans in the future.

But suppose you don’t declare bankruptcy and just soldier on without repaying what you owe. What happens then? At first, you probably just continue “rolling-over” the loan and paying more and more interest on the item you purchased.  If you took out a loan for a tangible item, the lender usually comes to repossess it. For example, if you’ve leased a car and you stop paying the lease, the company that loaned you the car will just take it back.

But if there’s no way for the lender to repossess the loan (if the loan was money, for example), the company has to take the matter to court. The lender can decide either to sue you (which basically forces you to either pay back the loan, declare bankruptcy, or be convicted in court), or to garnish your wages, which means that a judge decides to award a certain percentage of your paycheck to your creditor until the loan is repaid.

Once you get into serious debt, it’s very difficult to get out unscathed, so it’s better to avoid that decline altogether; you’ll just get forced into one of the above positions, and all of them have unpleasant consequences.

Tags: bankruptcy, debt, loans