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Here's what happens if you don't pay off the most common types of debt

CNBC logo CNBC 8/12/2017 Abigail Hess
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Americans have more debt than ever before. As of March 31st of this year, American households collectively held $12.73 trillion in debt, surpassing the record $12.68 trillion reached in 2008.

Some have argued that borrowers should band together and refuse to repay this mounting debt. In 2015 New York Times opinion piece titled "Why I Defaulted on My Student Loans," writer Lee Siegel explained that he does not plan on paying off his student loans and imagined a world in which borrowers collectively do the same.

He writes, "If people groaning under the weight of student loans simply said, "Enough," then all the pieties about debt that have become absorbed into all the pieties about higher education might be brought into alignment with reality. Instead of guaranteeing loans, the government would have to guarantee a college education."

But the realities of failing to pay off debt can be grim. Last year, a Texas man named Paul Aker was arrested by U.S. Marshalls for refusing to pay a $1,500 federal student loan he took out 30 years ago and refusing to appear for his court hearing.

And one of the biggest challenges for borrowers is that the rules that govern debt and its repayment can change. Debt can also change hands, meaning a borrower may find themselves dealing unexpectedly with a new and more aggressive collections agent.

So the question remains: To pay or not to pay? Here's a guide to what can happen if you fall behind on the most common types of debt.

Student Debt

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The repercussions of student debt depend on if it is federal or private. Over 44 million Americans hold a total of $1.4 trillion in student loan debt. When financing a degree, federal student loans are the best option because they often offer the lowest interest rates, broader borrower protections and more flexible repayment plans.

If you are unable to make a payment on your federal student loan by its due date, you have a 270 day grace period in which to pay. Every payment you miss will hurt your credit score and impact your ability to borrow in the future.

Once this period is over, your debt goes into default and the federal government is able to garnish your wages, Social Security check and federal tax refund. Federal student debt is typically handed over to third-party collection agencies who charge penalties and fees — as much as 18 percent of the balance.

The government also has the option of suing delinquent borrowers. Student loan expert Heather Jarvis tells Vice, "The federal government doesn't often sue, because they don't have to. But they will if they think it will get them access to other assets."

When it comes to private student loan companies, borrowers have much less flexibility. Joshua Cohen, a lawyer specializing in student loan debt tells Business Insider, "The only remedy that a private lender has is to sue you, and they are suing you under state law and every state differs."

Medical Debt

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According to a Consumer Financial Protection Bureau report, over 43 million Americans have medical debt. Of those who do, one-third have otherwise flawless credit scores. Taking on medical debt is unavoidable for millions of Americans, but there are still serious repercussions for not paying off your medical debt.

It's important to pay off medical bills as quickly as possible in order to protect your credit score. Insurance companies have been known to sue individuals for not paying medical bills, and 99.4 percent of medical debt is reported by third-party collection agencies who can be particularly aggressive.

A Michigan woman identified as Michele told ProPublica in 2014 that she had her wages garnished and was sued by a collection agency for not keeping up with the payments on a $900 medical bill.

"I fell behind in payments to the hospital and it was handed over to a collection attorney. I made monthly payments and didn't make them fast enough for the collection firm. I think I was behind by $50 when they served me," she says. "No other industry could charge consumers an arbitrary amount that the consumer can't approve before receiving the service. I felt like a tiny bug with a large corporation trying to suck the life out of me."

There are steps you can take to address a hefty medical bill before it goes to collections. When you receive a medical bill, the first thing you should do is check for errors. NerdWallet found that 49 percent of Medicare claims contain billing errors, and medical billing advocates argue that up to 80 percent of claims have errors.

If the claim does not have an error, experts suggest that you negotiate with your medical provider. Doctors can provide discounts for patients who are unable to make payments and some medical providers will offer financial aid options for low-income patients.

Housing Debt

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Americans hold $8.63 trillion in mortgage debt; in fact, mortgage balances make up the largest portion of U.S.-held debt.

According to GoBankingRates, "If you miss your first mortgage payment, your lender will typically offer you a grace period of 15 days. During these 15 days, you can send in your payment without being considered delinquent."

When this grace period is over, you will likely face a late fee as high as 2 to 5 percent of the monthly payment amount on your mortgage.

If you miss a second payment, your mortgage will likely go into default. At this point, the U.S. Department of Housing and Urban Development suggests that borrowers take advantage of free housing counseling programs.

After 90 days, you will likely be served a Demand Letter indicating you are delinquent on your loan. This is your last chance to make a payment on your mortgage.

After missing four mortgage payments, the foreclosure process typically begins. During this process, you have the right to remain in your home. The lender will submit a Notice of Default followed by a Notice of Sale. Within 21 days of the Notice of Sale, the house will be put up for auction, at which point you must vacate.

If you home is foreclosed, your credit score will be severely damaged, but you will not likely face legal repercussions.

Auto Debt

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Auto loan balances grew by $10 billion in 2016 according to the Federal Reserve Board.

The Consumer Financial Protection Bureau explains that if you miss payments on an auto lease, the consequences are dependent on your specific contract. If you miss a payment on your auto loan, you will likely receive a Notice of Missed Payment within a few weeks.

Depending on the specifics of your situation, your lessor is then allowed to repossess your car so long as it does not "breach the peace." The definition of this legal term varies by state, but generally means your car cannot be taken through physical force — if your car is in your garage, the lessor cannot remove it from your home.

A lessor can, however, use a Starter Interrupt Device (SID), which remotely deactivates a vehicle's ignition system. Many states have found that remotely disabling a vehicle does not "breach the peace."

Your contract and state law may give you the right to "cure," or reinstate, your lease after you have missed a payment. Check with your state attorney general or consumer protection office to see if you have this right.

If your car is repossessed, you may face a hefty termination fee and your credit score will be damaged.

Don'tmiss: This is the age most Americans pay off their student loans

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