Living in the U.S., everyone encounters financial issues at some point.

However, "What happens when you can't pay?" varies greatly depending on the nature of the debt.

One of the most common questions I receive as a CPA is exactly this. The consequences of not paying credit card bills, failing to pay taxes, or not settling medical bills are completely different.

Today, let's examine the legal and financial repercussions associated with different types of debt.

Credit Card Debt

The most common case is credit card debt. If you don't pay your credit card bill, initially, late fees and high interest rates apply. Typically, credit card companies report delinquency to credit bureaus after about 30 days, causing a significant drop in your credit score. If delinquency continues for more than 90 days, the credit card company transfers the account to a collection agency. From this point, you will start receiving calls, letters, and texts demanding payment. In the worst-case scenario, the credit card company may file a lawsuit, and if they obtain a judgment, it could lead to wage garnishment or bank account seizure. However, it is possible to have some debt forgiven through bankruptcy, so there are legal options available.

Medical Bills

Medical bills are also a significant burden in the U.S., and if unpaid, they similarly go to collections. Medical institutions usually wait about 90 to 180 days before transferring the debt to a collection agency. However, recently, the way medical debt is reflected on credit reports has been somewhat relaxed. Small medical debts may not be included in credit evaluations or may be removed after a certain period. Still, medical debt can often be resolved through personal bankruptcy, and you can negotiate with the hospital for discounts or long-term payment plans. However, ignoring the debt can ultimately lead to legal action, just like with credit cards.

Business Taxes

IRS tax issues are on a completely different level. Failing to pay taxes involves not just credit score issues but also the federal government's enforcement powers. The IRS can establish a tax lien and seize accounts or directly take wages. Even when selling property or obtaining loans, tax liens take precedence, creating significant restrictions. The IRS is open to negotiation, allowing for installment agreements or offers in compromise, but ignoring taxes is never a wise choice.

Fines (Traffic Violations, Court Fines, etc.)

Fines have another nature. If you do not pay fines imposed by the government, delinquency accumulates, and you may face license suspension, additional fines, or even arrest warrants. Because they are not simple civil debts but have a criminal nature, they often cannot be discharged through bankruptcy. For example, traffic violation fines or fines resulting from court orders are obligations that must be paid.

Student Loans

Student loans have long been a type of debt that is not easily discharged even through bankruptcy. Federal student loans can lead to wage garnishment, tax refund seizures, and even the withholding of a portion of social security benefits if not repaid. Recently, the U.S. government has expanded student loan forgiveness programs and income-driven repayment plans, but ignoring them still leads to aggressive collections. Private student loans are collected by private financial institutions, following similar procedures to credit card debt, but the possibility of bankruptcy discharge is low.

SBA Loans

Not repaying small business loans, or SBA loans, is somewhat different. Most SBA loans require a personal guarantee, meaning that even if the business fails, the individual owner is often held responsible. If not repaid, the SBA can initiate collection procedures at the federal level, which can also lead to tax refunds or asset seizures. Particularly, SBA EIDL (Economic Injury Disaster Loan) loans were widely distributed during the pandemic, and failing to repay them can put you on the government's collection list and significantly impact your personal credit in the long run.

Money Borrowed from Individuals

Finally, the most common yet complex situation is 'personal loans.' If you borrow money from a friend and cannot repay it, it becomes a civil debt legally, but there is no enforcement unless the other party files a lawsuit. However, if they do file a lawsuit and obtain a judgment, that judgment can lead to wage garnishment or asset seizure. The problem is that this process often involves significant costs and time, so it rarely escalates to a lawsuit. Therefore, trust is crucial in personal loans, and once a relationship deteriorates, you may lose not only money but also the relationship.

Ultimately, the consequences of not repaying debts in the U.S. vary greatly depending on the nature of the debt.

Credit card and medical debts lead to credit score drops and collections, while student loans and taxes involve direct government enforcement, fines lead to legal penalties, SBA loans involve personal guarantees, and personal loans depend on whether a lawsuit is filed.

As a CPA, my constant advice is to "not ignore debt." Whether negotiating, setting up payment plans, or considering bankruptcy, you must respond in some way. Ignoring debt does not make it disappear; rather, it becomes a greater burden over time.