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What Happens When You Can’t Pay Back an Unsecured Loan
by
JG Wentworth
•
August 7, 2025
•
9 min
Financial difficulties can strike anyone at any time, and when they do, unsecured loans—those not backed by collateral like a house or car—can become particularly challenging to manage. Understanding what happens when you can’t repay these loans is crucial for anyone facing financial hardship or considering taking on unsecured debt.*
Unsecured loans explained
Before diving into the consequences of default, it’s important to understand what constitutes an unsecured loan. These are loans that aren’t secured by physical assets, meaning lenders can’t immediately seize property if you default. Common examples include:
- Credit cards
- Personal loans
- Student loans
- Medical debt
- Payday loans
Because lenders take on greater risk with these loans, they typically charge higher interest rates and have stricter qualification requirements.
The immediate consequences of missed payments
Here’s what you can expect initially:
- Late fees and penalty interest rates: The first consequence of missing a payment is typically a late fee, which can range from $25 to $40 or more, depending on your loan terms. Many lenders also impose penalty interest rates, which can increase your annual percentage rate (APR) significantly—sometimes to 29.99% or higher. These penalties compound the problem by making your debt more expensive and harder to pay off.
- Impact on your credit score: Perhaps the most significant immediate consequence is the damage to your credit score. Payment history accounts for 35% of your FICO credit score, making it the most important factor. A single late payment can drop your score by 60 to 110 points, especially if you previously had good credit. The impact is less severe if you already have poor credit, but it still worsens your financial standing. Late payments are reported to credit bureaus once they’re 30 days past due, and they remain on your credit report for seven years. The more recent the late payment, the more it affects your score. Multiple missed payments create a pattern that signals high risk to future lenders.
The escalation process
Of course, the longer your payments remain delinquent, the more consequences you’ll face:
- 30-60 days past due: During this initial period, you’ll receive phone calls, letters, and emails from your lender’s customer service department. Many lenders are willing to work with borrowers during this stage, potentially offering payment plans, temporary forbearance, or modified terms. This is often the best time to communicate with your lender about your financial difficulties.
- 60-120 days past due: As your account becomes more delinquent, the tone of communications becomes more serious. You may start receiving calls from the lender’s collections department rather than customer service. The frequency of contact increases, and you may receive formal demand letters. Your account may be flagged as seriously delinquent, causing further damage to your credit score.
- 120+ days past due: After approximately 120-180 days of non-payment, most lenders will “charge off” your account. This doesn’t mean your debt disappears—it’s an accounting term indicating the lender considers the debt unlikely to be collected and writes it off as a loss for tax purposes. A charge-off appears on your credit report as a major negative mark and severely damages your credit score, often dropping it by 100 points or more.
Internal collections
Initially, the original lender handles collection efforts through their internal collections department. These collectors may offer settlement options, payment plans, or other arrangements to recover some of the debt. They’re often more flexible than third-party collectors because they have more authority to negotiate.
Third-party debt collectors
When internal collection efforts fail, lenders often sell the debt to third-party collection agencies or hire them to collect on their behalf. These agencies purchase debts for pennies on the dollar and profit by collecting more than they paid. Collection agencies must follow the Fair Debt Collection Practices Act (FDCPA), which limits how and when they can contact you, but their tactics can still be aggressive within legal bounds.
Debt collectors may:
- Call you multiple times per day (but not before 8 AM or after 9 PM)
- Contact your employer (but only to verify employment, not discuss your debt)
- Send letters demanding payment
- Report the debt to credit bureaus
- Attempt to negotiate settlements
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Your rights under the FDCPA
The Fair Debt Collection Practices Act provides important protections. Debt collectors cannot:
- Harass, threaten, or abuse you
- Use false or misleading statements
- Contact you at work if you tell them your employer prohibits such calls
- Discuss your debt with third parties (except your spouse or attorney)
- Continue contacting you if you send a written request to stop
You have the right to request debt validation within 30 days of first contact, requiring the collector to prove you owe the debt and that they have the right to collect it.
Lawsuits and judgments
If collection efforts fail, creditors may file a lawsuit against you. Unlike secured debt, where lenders can repossess collateral, unsecured creditors must go through the court system to collect. The timeline for lawsuits varies by state and creditor, but they typically occur within 2-4 years of default.
If you’re served with a lawsuit, it’s crucial not to ignore it. Failing to respond often results in a default judgment, where the court automatically rules in favor of the creditor. Even if you believe you don’t owe the debt or can’t afford to pay, responding to the lawsuit preserves your rights and may lead to better outcomes.
Wage garnishment
With a court judgment, creditors can garnish your wages in most states. Federal law limits wage garnishment to 25% of your disposable earnings or the amount by which your weekly wages exceed 30 times the federal minimum wage, whichever is less. Some states provide additional protections with lower limits.
Certain types of income are generally protected from garnishment, including:
- Social Security benefits
- Unemployment benefits
- Workers’ compensation
- Most pension payments
- Disability benefits
Bank account levies
Creditors with judgments can also freeze and seize funds from your bank accounts. Unlike wage garnishment, there’s no federal limit on how much can be taken from bank accounts, though some states provide modest protections. The same protected income types that can’t be garnished are also generally protected from bank levies, but the burden is often on you to prove the funds are exempt.
Asset seizure
While unsecured creditors can’t automatically seize your property like secured creditors can, they may be able to place liens on real estate or seize certain personal property through court orders. However, most states have generous homestead exemptions that protect your primary residence, and personal property exemptions that protect basic necessities.
Long-term credit score damage
The impact on your credit score from defaulting on unsecured debt is severe and long-lasting. A charge-off, collection account, or judgment can drop your score by 100-150 points and remains on your credit report for seven years from the date of first delinquency. This makes it difficult and expensive to:
- Qualify for new credit cards or loans
- Rent an apartment
- Get competitive insurance rates
- Sometimes even find employment, as some employers check credit reports
Once your credit score is damaged, you could find yourself dealing with the following:
- Difficulty obtaining future credit: Even after your credit score recovers, lenders may be hesitant to extend credit to someone with a history of defaulting on unsecured debt. When credit is available, it often comes with higher interest rates, lower credit limits, and less favorable terms. This can create a cycle where you’re forced to rely on high-cost credit options.
- Tax implications: If a creditor forgives $600 or more of your debt through settlement or charge-off, they typically issue a Form 1099-C, and you may need to report the forgiven amount as taxable income. This can result in an unexpected tax bill, though there are exceptions for insolvency or bankruptcy.
Student loans
Federal student loans have unique characteristics that make them particularly difficult to discharge:
- Most federal student loans don’t have a statute of limitations
- They’re rarely dischargeable in bankruptcy
- The government can garnish wages and tax refunds without a court judgment
- Income-driven repayment plans may reduce monthly payments
- Default rehabilitation and consolidation options are available
Medical debt
Medical debt collection practices are subject to additional regulations in many states. Some key points:
- Many hospitals are required to offer charity care or payment plans
- Medical debt under $500 may not be reported to credit bureaus
- Some states have extended protections for medical debt
- Medical debt is generally dischargeable in bankruptcy
Credit card debt
Credit card debt is typically the most straightforward unsecured debt to address:
- Credit card companies often have established hardship programs
- Settlement is more common with credit card debt
- Balance transfer options may be available if you have good credit
- Credit card debt is fully dischargeable in bankruptcy
The bottom line
Defaulting on unsecured debt can have serious and long-lasting consequences, including damaged credit, legal action, wage garnishment, and difficulty obtaining future credit. However, understanding these consequences and your rights can help you make informed decisions about how to handle financial difficulties.
Remember that while the consequences of defaulting on unsecured debt are serious, they’re not permanent. With time, effort, and the right strategy, it’s possible to recover from debt problems and rebuild your financial life. If you’re struggling with unsecured debt, consider consulting with a non-profit credit counselor or bankruptcy attorney to understand your options and develop a plan that works for your specific situation.
There’s always JG Wentworth…
Struggling with unsecured debt? We might be able to help. If you owe $10,000 or more there’s a good chance you’ll qualify for the JG Wentworth Debt Relief Program.* Some of our program perks include:
- One monthly program payment
- We negotiate on your behalf
- Average debt resolution in as little as 24-60 months
- We only get paid when we settle your debt
If you think you qualify for our program, give us a call today so we can go over the best options for your specific financial needs. Why go it alone when you can have a dedicated team on your side?
* This information is provided for educational and informational purposes only. Such information or materials do not constitute and are not intended to provide legal, accounting, or tax advice and should not be relied on in that respect. We suggest that You consult an attorney, accountant, and/or financial advisor to answer any financial or legal questions.
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* Program length varies depending on individual situation. Programs are between 24 and 60 months in length. Clients who are able to stay with the program and get all their debt settled realize approximate savings of 43% before our 25% program fee. This is a Debt resolution program provided by JGW Debt Settlement, LLC (“JGW” of “Us”)). JGW offers this program in the following states: AL, AK, AZ, AR, CA, CO, FL, ID, IN, IA, KY, LA, MD, MA, MI, MS, MO, MT, NE, NM, NV, NY, NC, OK, PA, SD, TN, TX, UT, VA, DC, and WI. If a consumer residing in CT, GA, HI, IL, KS, ME, NH, NJ, OH, RI, SC and VT contacts Us we may connect them with a law firm that provides debt resolution services in their state. JGW is licensed/registered to provide debt resolution services in states where licensing/registration is required.
Debt resolution program results will vary by individual situation. As such, debt resolution services are not appropriate for everyone. Not all debts are eligible for enrollment. Not all individuals who enroll complete our program for various reasons, including their ability to save sufficient funds. Savings resulting from successful negotiations may result in tax consequences, please consult with a tax professional regarding these consequences. The use of the debt settlement services and the failure to make payments to creditors: (1) Will likely adversely affect your creditworthiness (credit rating/credit score) and make it harder to obtain credit; (2) May result in your being subject to collections or being sued by creditors or debt collectors; and (3) May increase the amount of money you owe due to the accrual of fees and interest by creditors or debt collectors. Failure to pay your monthly bills in a timely manner will result in increased balances and will harm your credit rating. Not all creditors will agree to reduce principal balance, and they may pursue collection, including lawsuits. JGW’s fees are calculated based on a percentage of the debt enrolled in the program. Read and understand the program agreement prior to enrollment.
This information is provided for educational and informational purposes only. Such information or materials do not constitute and are not intended to provide legal, accounting, or tax advice and should not be relied on in that respect. We suggest that you consult an attorney, accountant, and/or financial advisor to answer any financial or legal questions.