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. Understanding what default is and your options after defaulting could help you take back control of your finances

What happens if you default on a personal loan?

Defaulting 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.

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 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 Collect 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.

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

Recovering from a personal loan default is possible. You just need the right debt relief strategy. If you think debt settlement or bankruptcy could be a good fit for you, it's worth scheduling a free consultation with a debt relief professional and speaking with a bankruptcy attorney. They'll be able to give you advice tailored to your situation to help you make the best decision.