What to do if you've defaulted on a personal loan

You took out a personal loan fully intending to pay it back. But then you lost your job or maybe some emergency expenses cropped up. Now you've fallen months behind on your payments, your creditors keep contacting you, and you're afraid to open your mail.

This situation is more common than you might think. Many Americans have found themselves in this position and they've taken action to regain control of their finances. You can do it, too.

It starts with knowledge. When you know what default is and your options after defaulting, you could take back control of your finances.

What happens if you default on a personal loan?

To default on a personal loan means you stopped making payments or didn't make payments as outlined in your loan agreement. Many creditors give you a grace period, which could last as long as a few months, before they consider you officially in default. At that point, they may take action, like charging off and selling your debt or sending your account to collections.

If you're in this situation, stay calm. You have rights and there are ways to get debt relief after default.

How long before a personal loan is in default?

A missed payment doesn't put you in default right away. If you're just a few days late, you might even avoid a late fee if you catch up right away. When you're 30 days late, your loan becomes delinquent and a late fee is definitely on the table. So is a report to the credit bureaus.

Default typically comes a couple months later if you never catch up. The exact timeline depends on your lender and your loan agreement.

Here's how the progression often unfolds:

• One missed payment: If you catch up ASAP, you could go on as normal.

• More than 30 days past due: Your loan is reported to the credit bureaus as delinquent and you'll likely owe a late fee.

• Around 90 days past due: Your loan goes into default, though your loan agreement sets the exact point.

• After default: Your lender may charge off the balance and send it to a debt collector.

How personal loan default affects your credit

A default, and the missed payments that lead to it, count as negative credit report marks that can significantly lower your credit scores. Payment history is the biggest chunk of your credit score, and missed payments can hit it hard.

Going forward, that negative mark can remain on your credit report for up to seven years. During that time, the mark could make future credit harder to get, and it could raise the cost of any credit you're approved for.

The good news is that a default is one part of your credit picture, not the whole story. Newer activity carries more weight, so resolving the debt and making on-time payments going forward could help you bounce back over time.

Achieve is not a credit repair organization and does not provide or offer services or advice to repair, modify, or improve your credit.

Can you be sued or have your wages garnished if you default on a personal loan?

Yes, a lender or debt collector could sue you over an unpaid personal loan. If you lose, the court could order your wages garnished.

Lawsuits aren't typically a lender's first move, but personal loans are unsecured, so the lender has no collateral (something of value that backs up the loan) to collect if you stop making payments. If you can't resolve the debt another way, the lender may see a lawsuit as the only option.

Lenders and debt collectors can't garnish your wages without a court judgement. But if the court rules against you, that judgment could lead to wage garnishment or a lien on your property. The judgment could also be reported to the credit bureaus.

Even if you lose a debt lawsuit, you can't be jailed simply for owing a personal loan debt. This kind of debt is a civil matter, not a criminal one. Debt collectors aren't legally allowed to threaten you with jail time.

What should I do if my loan is sent to collections?

If your creditor sends your account to a collection agency, that company will likely reach out to you to try and collect the debt. They should provide you information on the debt, including:

• Name of the creditor

• Amount you owe

• Instructions on how to dispute the debt

You should request a debt validation letter to confirm that you owe the debt and that the information the collection agency has is accurate. The Consumer Financial Protection Bureau (CFPB) has debt validation letter templates you can use. Request this information within 30 days of your first contact from the collections agency.

Once the debt collector validates the debt, it can contact you for payment. You can ask (in writing) that it stop contacting you and it must comply, but this may not be the best idea. If the debt collector can't contact you about the debt, it could have no other option than to sue.

Debt collectors aren't allowed to threaten or harass you. You're protected by the Fair Debt Collection Practices Act (FDCPA). If any debt collector threatens to harm you or your family, contact the CFPB.

What not to do when you've defaulted on a personal loan

The first thing to not do is panic. You can still manage the situation as long as you stay calm.

You also don't want to ignore your creditor or any debt collectors. Ignoring the debt won't make it go away, and it could lead to escalation like a lawsuit.

Talk to your creditor about your options for getting back on track. They may offer a payment plan or other help if you're facing financial hardship. You may also consider debt settlement, where you negotiate with your creditors or a debt collector to accept less than you owe to get rid of your debt.

What to do if your personal loan has a co-signer

Sometimes, a personal loan co-signer could mean you get a more affordable rate than you could on your own. The flip side is that you're both equally liable for the debt.

When you default on a debt, creditors will likely contact your co-signer for payment. Your co-signer's credit scores could also be damaged by the default. If the debt goes to collections, the collection agency will likely contact the co-signer, and any lawsuits could name both of you.

It's best to tell your co-signer about any issues as soon as possible. Be completely honest with your co-signer about your situation so you can both come up with a strategy to address the default. If you've received a letter from a creditor or debt collector, be sure to share this, too, so they have all the information.

Can you get debt relief for a personal loan?

It's possible to get debt relief for personal loans through debt settlement or bankruptcy. In debt settlement, you negotiate with your debt collector, either on your own or with the help of a professional debt settlement company, to accept less than you owe and forgive the rest of the debt.

Personal loans could be great candidates for this strategy because they're unsecured debts, not backed by collateral (something of value) that the creditor could seize and sell. Many debt collectors could be willing to negotiate with you, especially since the default clearly indicates you're experiencing financial hardship.

Bankruptcy is another common option. Chapter 7 bankruptcy could help you get clear of your personal loan debts in a few months, though there are income limits and you may have to sell some of your possessions. Chapter 13 bankruptcy is a three- to five-year payment plan that restructures your debts if you don't qualify for Chapter 7.

How to avoid defaulting on a personal loan

If you're behind but not yet in default, you have time to change course. A few steps could help you protect your budget and your credit.

First, contact your lender early. Ask about hardship options like a payment plan, a short deferment, or a modified due date that lines up with your payday. Lenders often prefer to work with you rather than lose the payment.

Next, review your budget. Find expenses you can pause so you can free up the money for your loan payment.

You can also weigh whether combining higher-interest debts into one predictable fixed payment fits your plan. A personal loan through Achieve Personal Loans is one option for consolidating high-interest debt into a single fixed monthly payment. This works best as a planned move before you fall into default, not as a way to cover a loan you've already defaulted on.

What's next: Can I recover from a personal loan default?

You can recover from a personal loan default, and many people do it every year. You often just need the right plan.

Start by getting the account back on track if you're able. Set up a repayment plan you can realistically afford, or consider settlement or bankruptcy if those options work best for your situation. Get every agreement in writing before you send any money, so you and the creditor share the same terms.

Once the debt is resolved, rebuild your momentum. Make on-time payments across your other accounts, keep your future balances manageable, and check your credit regularly to monitor your progress.