What Are the Stages of Delinquency?
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The macroeconomic data coming out of the U.S. has been a mystery. Real GDP — used as a barometer of economic growth — fell for the past two consecutive quarters, indicating a looming recession. Nevertheless, it is expected to return to positive territory in the third quarter. Inflation is far ahead of the Federal Reserve's 2% target but is decelerating. Meanwhile, job growth remains strong, and the August unemployment rate — the most recent reading — came in at 3.5%.
These uncertain times mean more and more people are turning to debt to finance their lifestyle, or in most cases, to afford essential items. And as more people take on debt, there's a high likelihood that default rates will rise. Indeed, delinquencies have started to tick up after falling to historic lows during the pandemic, according to the New York Fed. For the record, late payments stay on your credit report for seven years.
Related: Which Debts Should I Pay Off First?
In this article
What is a delinquency?
A debt delinquency, also known simply as delinquency, refers to the inability of the borrower to pay back their debts and bills on time. These unpaid dues are reported to the credit bureaus as delinquent after a payment is more than 30 days late. The longer the duration of the outstanding debt, the more it affects you. That's why experts advise of clearing your dues on time and in full each month because otherwise one of two things may happen:
- You may not be able to secure credit: Your payment history has a 35% weightage in your credit score, making it the single most important factor affecting your score. When future lenders see a payment past due, that'll give them pause because you're seen as someone with a higher risk of default.
- Your debt is sold to a collector: You don't want this to happen. Trust me! Debt collectors can employ aggressive tactics such as wage garnishments, lawsuits and foreclosures to get you to pay up. Debt collection agencies have long been considered predatory. To top it all of, the industry is rampant with bad actors looking to .
What are the stages of delinquency?
The debt delinquency timeline has four stages, and each one gets more punishing financially than the last.
Stage | Corrective measure |
30 days past due | Ask your creditor for a payment plan |
60 days past due | Try to bring your account current |
90 days past due | Negotiate a payment plan with the creditor, enroll in a debt management plan |
120 to 180 days past due | Validate debt, negotiate a settlement with the collection agency |
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Stage one: 30 days
The 30-day first stage indicates that you have missed one monthly payment and your creditor
will communicate the missing payment through a call or a letter. If you're on good terms with the creditor and your debt repayment history is good, the creditor may be willing to look past this delinquency, meaning you may not be hit with late fees or a fine. The creditor may also choose to not report the 30-day delinquency to the credit bureau. Again, this depends on your relationship with the lender and whether you've remained current on all previous debt obligations.
Related:
Action plan
After a missed payment, opening up a line of communication with the creditor is advisable immediately. Whether it was an emergency visit to the doctor's or an unexpected car repair bill, let the lender know the reason for the delay. This tells the creditor that you didn't miss the payment in bad faith, and as a result, they may be willing to look past it as a result. There's a 29-day grace period between when you miss a payment and when it has to be reported to the credit bureaus.
Alternatively, you could also talk to your creditor about potentially carving out a payment schedule that incorporates the missing payment. This will assure your creditor that you are committed to paying your loan, and it may just be enough for them to not take any corrective measures that may hurt you in the long term.
Stage two: 60 days
The second stage indicates you have missed two back-to-back credit card or
loan payments ... and it's bad for your financial health. If you've missed a payment for 60 days, the creditor is unlikely to be sympathetic to your financial situation. This stage may also come with strict penalties, affecting your credit score.
At the 60-day stage, the creditor may also consider selling your debt to a debt collection agency, which will purchase any type of debt for pennies on the dollar. As noted, debt collectors will do anything they legally can to make you pay up. For the record, the Fair Debt Collection Practices Act, prohibits debt collectors from engaging in illegal means to harass or threaten debtors into paying.
Action plan
The foremost priority of the borrower should be to keep their account and current credit cards working. This can be possible when you pay back the unresolved debt you owe. In other words, your account and your card may be blocked, which means you may not be able to make essential purchases.
You could try and engage with your lender, and try to talk with them about a new payment plan. This might be your last chance to avoid a legal battle and settle the matter in private. The longer you wait to make a deal with your creditor, the more severe consequences you risk.
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Stage three: 90 days
Story time: Many moons ago, before I dabbled in the world of personal finance, I applied for a auto loan. Unknown to me at the time was a few dollars worth of credit card bill that was 90 days past the billing cycle. As a result, I was asked to put in more money toward the down payment, wasn't given the best rate, and extended my loan term. All these actions mushroomed out of my inability to make a timely payment, and in the end, I ended up paying more money for the vehicle than I would have if I had made the payment on time.
The moral of the story is that 90 days past due is bad financially, and it may cost your wallet more than you expect. A few credit card companies may also block your card and close the associated account.
Action plan
Your creditor agreeing to a customized payment plan is really the only course of action available to borrowers at this stage. Although the lender will surely have the upper hand in any such arrangement, it is still in the best interest of the borrower to settle for extra
payment rather than taking the matter to court.
Turning to a credit counseling agency may also prove to be a useful option. The credit counselor can help you clear off your debts through a payment plan. This scheme typically requires that borrowers close all of their current accounts and make payments to the agency every month. This payment will then be used to pay the creditor.
Another option for you to explore would be a debt management plan by NGOs or
nonprofit organizations. These plans take about three to five years to complete, but once you graduate, you'll be debt free and can begin anew.
Stage four: 120 to 180 days
This is the final stage of debt delinquency, and your delinquent account may be declared as a charge-off by the creditor. If your creditor hasn't sold your debt to an agency yet, the idea will begin to look like a better option to them right about now. In fact, they'll likely pull the trigger at this stage. From the lenders' perspective, selling your debt (as opposed to going after you for payments), is a better use of their resources. Plus, they get to make a little something instead of losing the whole amount.
Action plan
When your debt has been sold to an agency and they've contacted you, you should first validate the debt. Take a look at your credit report to see if the debt was already paid (looking to collect on settled or discharged debts isn't unheard of), or whether the debt is even yours. Once you've made the assessment, you can begin to negotiate with the collection agency.
You should first try to negotiate a settlement plan with the agency. Most debt collection agencies are willing to accommodate and work with borrowers on a payment plan. But you should get everything in writing, as always. Before starting discussions with the agency, it's also a good idea to read up on your state's statute of limitation and what your rights are. This homework will provide ammo that can be put to use during the negotiation phase.
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The bottom line
Debt becomes delinquent when a monthly payment is missed. Debt delinquency has four stages determined by the numbers of days that have lapsed since you missed a payment, and each stage provides less room for a favorable outcome than the last. You may be able to negotiate with your creditor at the 30-day mark, but the creditor may not be too sympathetic to your financial hardship later on. As you continue to miss payments, your chances of securing a favorable deal get thinner, until eventually, your debt is sold at the 120-day mark. When your debt is acquired by a collection agency, they may pull legal levers to get you to pay back the money, even if it's a fraction of what you owe.
Making payments on time go a long way in securing your financial future. You can set up autopay on your account to ensure you never miss a payment. You could also set up payment reminders on your phone. If your debts have different due dates, you could try to have them changed to the same date. This will ensure no debt is overlooked. By developing good financial habits from an early stage, you can avoid a debt delinquency, which affects your credit score for as much as seven years.
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Writer
Jasir Jawaid is Joy Wallet's Assistant Editor. He has more than 13 years of experience as a journalist covering Wall Street, equities, financial policy and regulation, and cryptocurrency and blockchain.
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