How to get out of debt without paying

Despite your best intentions to pay down debt, sometimes life gets in the way, leaving you with little to no money in your budget. This raises the question, “What happens if I stop repaying my debt altogether?” 

It’s a fair question to ask, and in some cases, you may even be able to get out of debt without paying ever again. However, adopting this strategy definitely comes with consequences, and there may be some alternate approaches that could better preserve your financial health. Here’s what you’ll need to know.

How to get out of debt without paying

The following are some strategies for discontinuing your debt payments and the potential ramifications of doing so.

How to get out of credit card debt without paying

Though it’s not recommended, you can stop paying your credit card bill and wait for the issuing company to eventually “charge off” your account. 

A charge-off is when a creditor effectively gives up on trying to collect the funds you owe them and instead writes off this debt as a loss. Generally, this happens after six or more missed payments or when the account has been delinquent between 120 and 180 days.

Most likely, your debt will be sold off to a collections agency that will then aggressively try to pursue you for repayment. However, a statute of limitations limits how long creditors can sue you for unpaid credit card debt. This period varies from three to 10 years in most states. 

How to get out of student loan debt without paying

When it comes to federal student loans, the Department of Education already has several great programs in place that may result in your debt being forgiven.

• Income-driven repayment plans: These repayment plans reduce your monthly payments to 10 to 20 percent of your income for the next 20 or 25 years (depending on the plan). After that, the remaining loan balance is forgiven. “Going this route can help you eventually get free of your debt, but it will take a long time to get there,” says debt attorney Leslie Tayne, founder of Tayne Law Group. “Plus, you may have to pay taxes on the forgiven amount. However, the tax implications are currently paused until 2025 due to the pandemic.”
• Public Service Loan Forgiveness: This program is available for those who work in the public sector, such as government employees and those working for nonprofit organizations. Your loans will be forgiven after you’ve made 120 qualifying payments while working full-time for a qualifying employer. “While pursuing Public Student Loan Forgiveness takes less time than following an income-driven repayment plan, your employment options will be limited,” says Tayne. “The good news? Any forgiven balance will not be considered taxable income.”
• Teacher Loan Forgiveness: Teachers who work five consecutive years at a low-income elementary or secondary school or those who work at an educational service agency can qualify for teacher loan forgiveness. You may qualify for forgiveness of up to $17,500 of your Direct Loans or Stafford Loans.
• Perkins Loan Cancellation: Firefighters, teachers, law enforcement officers and others may be eligible for Perkins Loan cancellation or discharge. Cancellation happens gradually over a five-year period, while discharge could occur in the event of bankruptcy, death or disability.
• Closed school discharge: You may qualify to have your federal student loans discharged if your school closed while you were attending (or soon after you withdrew). Find a complete list of eligible schools on the Federal Student Aid website.

Unfortunately, private student loans do not qualify for these debt forgiveness programs.

How to get out of debt through bankruptcy

If you’re truly struggling financially and have exhausted all other options without success, you may have few other choices but to file for bankruptcy. However, note that bankruptcy should only be considered an option of last resort because it can have long-lasting financial repercussions (such as staying on your credit report for up to 10 years).

The following are the two most common types of bankruptcy:

• Chapter 7: Some of your assets will be sold to pay back the debt, meaning you could lose your home, vehicle and other personal property. A few months after filing, most of your remaining debt will be discharged. 
• Chapter 13: This filing results in a court-ordered repayment plan. Most remaining debt after a certain period (usually three or five years) will be discharged. 

Please note that bankruptcy does not wipe the slate entirely clean. Some obligations such as student loans and child support are non-dischargeable.

The problem with stopping debt payments

Before walking away from debt without paying it off, it’s critical to familiarize yourself with the potential negative consequences and long-lasting ramifications. Some of these include:

• Poor credit: Your credit score will drop significantly — possibly falling into the “fair” or “poor” range. It could take years to recover.
• Difficulty borrowing money in the future: Because of your decreased credit score, most major lenders will reject your application for a new loan or credit card.
• Increased cost of borrowing money in the future: If you do happen to get approved for a loan or credit card, it will most likely carry a higher interest rate than what you’re accustomed to. 
• Having your property seized: If you walk away from a mortgage or auto loan, the bank can legally seize your home or vehicle since these assets are usually listed as the collateral on the loan agreement.
• Harassment from collection agencies: People who let their accounts become charged off often report receiving non-stop and often intimidating phone calls from collection agencies seeking to recover the debt.
• Lawsuits: Depending on the situation, you may even be summoned to court and have a judgment placed against you such as having your wages garnished.

Ways to keep paying your debts

Rather than avoiding your debt, you may find it better for your financial health to take an alternate approach. The following are a few good commonly used strategies.

Debt consolidation 

In debt consolidation, you essentially use a new loan to pay off all of your existing debts. This new loan typically has a better interest rate and more favorable terms, and it reduces your obligation to just one manageable payment per month.

Debt management plan

A debt management plan (DMP) is a special arrangement where you work with a nonprofit credit counseling agency to pay off your debt. The agency advocates on your behalf to negotiate lower rates and potentially forgive fees while you send regular monthly payments. Going on a DMP does not forgive your debt, but similar to debt consolidation, it does simplify your obligation to a single, manageable payment. 

Debt settlement

Debt settlement involves settling your debt with the current lender (or collection agency, if it’s reached that point) for less than what you owe. “Debt settlement is an agreement that you would make with your creditor where the creditor agrees to accept less than the amount owed to satisfy the debt. Amounts generally fall in the range of 50 to 80 percent of the balance,” said Katie Bossler, of GreenPath Financial Wellness. “You can negotiate your own settlement or hire a lawyer to negotiate on your behalf.”

Contact your creditor

Sometimes calling your lenders directly and explaining your financial hardship can be a big help. They might offer a new promo rate, eliminate certain fees or even temporarily pause your payments. 

Credit counseling

Several nonprofit organizations are available to help you overcome your debt. You’ll talk with a certified credit counselor and receive professional insights on debt repayment options. A counselor can also review your budget and help find ways to cut costs so that you can accelerate your debt pay-off progress. The Financial Counseling Association of America and the National Foundation for Credit Counseling are a few to try.

The bottom line

It can be tempting to pursue debt relief options that get you off the hook with creditors without having to repay what you owe. However, the short-term benefits may not be worth the potential long-lasting negative impacts that often come with these methods.

Take some time to analyze the pros and cons of each approach before deciding how to move forward. You’ll often find that taking a more pragmatic approach to working with your creditors through a DMP or debt settlement will be better for your financial well-being in the long run.

— Dori Zinn contributed to a previous version of this article.