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If I have an unsecured loan I can't pay how does debt collection work?

If you have an unsecured loan that you cannot pay and you don't pay it, the debt collection process is one that you do not want to have to encounter. There are a series of steps that are implemented and there are severe consequences that occur when you do not pay your debts.

First, you will have a negative mark placed upon your credit record once you are 60 days past due. During this time your lender will send you a letter demanding payment. This letter will also warn that there could be a negative impact on your credit report. This negative impact will last 5 years. This means that obtaining new credit, getting a job, or finding a place to rent could become difficult.

After sending a letter and making a phone call, they may turn the account over to a debt collection agency and that agency will also send a letter.

The next step after sending a letter is the lender making a phone call demanding payment be made. If the debt collector is unable to get a hold of you they will use skip tracing to try to find you. This means that they utilise a system that is used especially for tracing down individuals who have left some traceable trail. This can be through the nonpayment of other bills or other criteria.

If skip tracing is not successful, the debt collector will continue to search for 12 months. After 12 months, they will place a "clearout" on your credit record. This clearout will remain on your credit record for 7 years from the time it was placed on there. This means you could have a total of 8 years of bad marks on your credit record to contend with. Default marks are placed on the report for the first year for every month payment is missed.

If you are located through skip tracing, the debt collector will try to negotiate a settlement with you. If they are unable to negotiate, they will send you a second letter that demands payment. If you still do not pay or meet some sort of settlement, the debt collector will make a final phone call and you will receive another letter.

The next part is where it gets a little nastier because you get another letter of demand that states you have 14 days to settle the account or legal action will be taken. If you decide to take action, then you are fine. You will have to wait 5 years before the default marks are removed from your credit report, but at least you do not have to worry about legal action or a clearout.

However, if you still do not reach some sort of arrangement, the debt collector will submit a full report to the lender suggesting that legal action be taken against you. This legal action can be in the form of directly suing you for the amount or garnishing your wages to recover the outstanding debt.

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