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March 12th, 2009

Are You Headed To Prison For Not Paying Your Debts?

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According to the Associated Press, the number of people receiving jobless benefits for more than a week increased by 193,000 to 5.3 million, the most on records dating back to 1967. A lot of people are out of work and many economists believe there will be more layoffs in our future. Consumers who have been struggling with consumer debt are now trying to figure out what to do when their income shrinks or disappears. Debt settlement, debt consolidation, and bankruptcy are all strategies that get researched. One question that many ask is whether they’ll wind up in jail for not paying their debts.

Are you headed towards debtors’ prison?

There is no such thing as a modern-day debtors’ prison. Simply defaulting on your unsecured consumer debt is not considered a crime and is treated as a civil matter. Sure, you may wind up in court, however, you risk having your wages garnished - not being thrown in jail.

Until the mid 19th century, there were in fact debtor’s prisons for those that failed to repay their obligations. Creditors began to realize that by punishing those that had been delinquent would only make the matter worse. Debtors, while in jail, were unable to work to pay off the debt. By throwing the debtor in jail, the creditor all but guaranteed they would not receive repayment of the debt.

What happens if you don’t pay your debts?

Even though you won’t wind up serving time in jail for not paying your debts, it is important to understand the consequences of not repaying what you owe.

  1. Damage to Credit Report. Once you begin to fall behind, your creditor will most likely report the delinquency to the credit bureaus. If the account is charged-off or goes to a collection agency, that too will be reported. With each reporting of a derogatory item, your credit score will be penalized. This will make it more difficult to borrow money in the future, obtain employment in some industries, as well as result in higher insurance premiums.
  2. Harassing Collection Calls. After you’ve gone past due on your balances and later when the account is sent to a collection agency, you will begin to receive frequent calls from the creditor or agency attempting to recoup whatever money they can from you. In some cases, these calls may cross the line and become harassing. They can cause a great deal of stress and emotional trauma for many. It is paramount that you understand your rights and what a collection agency is or is not able to say or do.
  3. Legal Action. If the creditor or collection agency is unable to recover money from you, they may choose to take legal action. They can hire an attorney to sue you in the hopes of winning a judgment for the outstanding balance. They can then seek, depending on your state’s laws, to garnish your wages or place a lien against your assets. Federal law limits the amount that can be taken through garnishment of your wages. The amount from one or more garnishments cannot exceed 25% of your disposable income for that week, or the amount by which disposable earnings for that week exceed thirty times the Federal minimum hourly wage, whichever is less.

You may not be facing jail time by not repaying your debts, however, there are definitely consequences to not making good on what you owe. If you’re fortunate enough to still be employed, it’s best that you explore debt reduction and elimination options like debt settlement, debt consolidation, and bankruptcy prior to losing your job.

About Author:

Chris Rocks is the Regional Director of the National Credit Federation (NCF), a consumer advocacy group that assists small business owners and consumers overcome debt and credit challenges.

Post written by Chris Rocks

One Response to “Are You Headed To Prison For Not Paying Your Debts?”

  1. gpogol Says:
    March 12th, 2009 at 1:46 pm

    You may not have to pay your debt if its very old (there are statutes of limitations on debt collection in every state). Check out this article for tips on sidestepping old outstanding debts.

    http://www.mortgagecreditproblems.com/blog/old-debt-dont-let-your-past-haunt-you/#more-71

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  • Chris Rocks is the Regional Director of the National Credit Federation (NCF). NCF is a nationwide membership-based organization that assists consumers recovering from a financial difficulty and those who need a significant increase in their credit score. Chris began his financial services career as a Financial Advisor helping young families with risk management and asset accumulation strategies. It was during that time that Chris realized that many of these young families also needed someone to guide their choices with regards to debt management. He made the transition into the mortgage industry where he first worked as a loan originator and later the Vice President of a small mortgage company. As Chris came across clients who had suffered through financial challenges and saw the difficulty they had in re-entering our credit driven economy, he discovered there was a real opportunity to leverage his unique background and help others. He can be contacted by visiting his personal site, GoodCreditLiving.com.

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