You've Defaulted on Your Loan. Now What?

You never planned on missing those mortgage payments or falling behind on your student loan obligations. But maybe you lost a job, or maybe you didn't land that higher-paying position you imagined when you first took out your loans.

Now, you're in default — behind on your payments. You've received warning letters from your creditors, and collection agencies are leaving messages on your voicemail. What can you do?

There are steps you can take to dig your way out of default. None of them are pleasant, but if you're willing to work, you can stop the calls from collection agencies, pay back what you owe, and move on to better financial times.

When Are You in Default?

There's a difference between being late on your loan payments and in default. Official default varies according to loan. You're considered in default on your mortgage payment if you're more than 30 days late. You're not officially in default on your student loan payments until you're 270 days late.

Being in default can be costly. Your lender will start charging late fees, and your credit score will plummet by at least 100 points.

If you miss too many mortgage payments, your lender will eventually begin the foreclosure process, which could end up with you losing your home. If you go into default on your federal student loans, the consequences can be equally severe: The government could begin garnishing your wages, automatically deducting up to 15% of your paycheck to recover what you owe. The government can even sue you for what you owe. You can't even discharge your federal student loan debt through bankruptcy.

And no matter what type of loan on which you default, you'll face additional fees charged by the collection agencies tasked with forcing you to pay up.

What Can You Do?

It's obvious, then, that being in default is bad news. But what can you do to alleviate your financial suffering if you've already fallen into default?

Talk to Your Creditors

The first step, no matter what debt you are facing, is to call your lender. Yes, that's not an easy call to make. But your lender might offer solutions to your debt problems. Your mortgage lender might offer to lower your interest rate to make your monthly payments more affordable. It might even offer a modification, in which it changes the terms of your loan so that you end up with a payment that fits more comfortably in your budget.

The lender behind your student loan might offer you a debt-consolidation program, in which all of your loans are consolidated into one monthly payment that you can afford.

Don't Ignore It

If you don't call, and if you try to ignore your debt, the problem will only grow. Don't expect your creditors to forget about you. They'll simply keep adding to the fees they're charging you. At the same time, your credit score will continue to drop.

If you're in default on a federal student loan, you might qualify for the Federal Loan Rehabilitation Program. This is a one-time chance to remove the default from your federal student loans from your credit reports and to start making your payments over again with a clean slate.

Call your student-loan lender to request this program. Once you are in rehabilitation, if you make nine on-time payments within a 10-month period on your federal student loans, your default status will disappear from your credit reports. This will be a big help to your credit score. You can then work with your lender to select the right repayment plan for you, hopefully leaving you with a monthly payment that you can afford.

This option isn't available on other loans on which you've defaulted, of course. And if you can't work out a repayment plan with these lenders, then you'll have to face the consequences. If you default on your mortgage, this means potentially losing your home. If you default on your auto loan, your creditors can repossess your auto loan.

Rebuild Your Credit

After these consequences happen? Your next move is to rehabilitate your credit score. This is an important step: You'll need a strong credit score to qualify for credit cards and future loans. Lenders today consider a FICO credit score of 740 or higher to be a good one. If your score is too low, lenders will either deny your requests for loans or charge you high interest rates.

Repairing damaged credit isn't complicated, but it does take time. Make all of our monthly payments on time. Pay down your credit card debt — but don't close credit card accounts that you've paid off and no longer use. Doing so reduces the amount of credit available to you and will cause your score to fall. (See also: How Secured Credit Cards Can Rebuild Your Credit)

You'll have to be patient here. It can take months, a year, or longer of paying your bills on time and slashing your credit card debt to repair your credit score. The effort, though, is worth it. It's not until your credit score is a healthy one that you can truly say that you've put your loan default behind you.

Have you ever defaulted on a loan? How'd you bounce back?

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