How to Get Rid of Debt Without Paying

How to Get Rid of Debt Without Paying

There are a few options to get out of debt without paying. Student loans have the best options. It is possible with some types of other debt but not all. How to do it? You will get answers to these and other questions in this article.

In this post we are not saying you should skip out on your debts. If you are in a situation where you are unable to make payments first try to reach a settlement with your lender to pay back the loan in good standing. Before defaulting consider renegotiating the payment amount or interest rate, inquiry about pausing payments, etc. You may also be able to consolidate several loans into a single loan with a better interest rate and monthly payment. 

How to get out of student loan debt without paying

In some fields such as medicine, law, education and social work there are programs that will pay back part of all of your student loan debt based on where you work after graduation.

  • Public Service Loan Forgiveness - this plan can be used by people who work in the public sector or for non-profit organizations. Once you make 120 qualifying payments while working for a qualifying employer the remainder of your Direct Loans will be forgiven. 
  • Teacher Forgiveness Loan - this loan is open to teachers who have worked for five years in a low-income elementary or secondary school, but also to those who work in an educational service agency. In this case, you may qualify for forgiveness of up to $17,500 of your Direct or Stafford loans.
  • Perkins Loan Cancellation and Discharge - firefighters, teachers, and law enforcement officers are eligible to cancel this program.

Consequences of not paying a debt

If you decide to stop payments towards a debt you should know the limitations, but also what are the consequences of not paying the debt.

Every type of debt is different (mortgage, credit card, auto loan, personal loan, student loan, child support, alimony, back taxes, etc). 

If the debt is secured (means there is an asset like a house or car tied to it) the lender will go after that to compensate them for the loss. So you could be evicted from your house or have your car repossessed if you fail to pay on the loan. The best option there is to simply sell the house or car if possible to cover the debt, but this assumes you have enough equity to pay off the balance. If you are under water on the home or vehicle that is a different story.

In the case of a credit card or personal loan there is nothing physical the lender can go after. In these cases it will impact your credit negatively and can lead to fees and penalties.

If you are sued and lose in court your wages could be garnished, which means up to 25% of your paycheck can be diverted to the debt. Garnishment is not only for owed alimony and child support but also comes into play for credit card debt.

If you ignore it long enough it will eventually go away (maybe, sort of)

Unpaid debt will show up as a big red flag on your credit report for seven years. This will negatively impact your ability to get new credit (loans, credit cards, etc). After seven years it will drop off. During that time expect to be harassed by debt collectors, get a lot of nasty mail, and possibly be sued in court.

Each state has a different statute of limitations, which is the number of years you can be brought to court to settle the debt. It is generally 3-6 years, but in some states it is up to 15 years.

However, for either of these, if you make a payment, even if it is late, the clock restarts. 

This approach is very risky as you could be sued and have your wages garnished. Not to mention debt collectors will be harassing you the entire time, calling at all hours of the day. Having unpaid debts can also lead to psychological stress, nightmares and other negative side effects.

Bankruptcy as an option

Going bankrupt means having nothing, basically starting over. With bankruptcy, not only do your debts go away, but any major valuables, tools, vehicles, property, investments etc need to be sold to cover the bank's losses. In reality you are allowed to keep a normal amount of stuff so you can live and work. Retirement accounts and home equity may be partially shielded. The laws vary state to state. Talk to a bankruptcy attorney about how all this works.

If you go bankrupt your credit rating will be ruined for a few years. So no new loans, credit cards for several years. The bankruptcy itself appears on your credit rating for 7-10 years, but the older it is the less of an impact it has on your ability to get new financing.

In order to go bankrupt you need to meet a “means test” which shows that your income is no longer enough to pay back the debts. So if you are making a lot of money and simply don’t want to pay back your debts, this is not an option.

Some debts may not be bankrupted out. These include student loans, alimony, child support, tax liens, etc.

Again the rules vary state to state. You’ll need to work with a bankruptcy attorney to get the specifics.

Alternatives to skipping payments or going bankrupt

Sometimes you simply are not in a position to make payments. To avoid the worst of this situation, you can do a few things:

  • Ask the lender for help in the form of reducing or pausing payments.
  • Look into consolidating or refinancing with better terms.
  • Get help from a non-profit credit counseling organization that will make a plan for you to pay off your debt.

Conclusion: Debt repayment is a serious matter. While there are programs for student loan forgiveness, other types of debt are hard to get out of. Bankruptcy is one option that you’ll want to discuss with a bankruptcy lawyer.

The post How to Get Rid of Debt Without Paying is part of a series on personal finances and financial literacy published at Wealth Meta. This entry was posted in Personal Finance, Risk Reduction
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