For the debtor, it's an embarrassing, degrading situation that often leads to the disruption of a home. The debt spiral begins. Instead of working out payment plans with creditors, drastically scaling back living habits, trying to increase income or a combination of these tactics, the debtor borrows more money to pay off the old bills. Bad debt begets more bad debt. Suddenly credit cards, which used to be a discretionary expense, become a vicious drain on basic income if card balances are never paid down.
Black marks appear on the debtor's credit record.
Creditors and collection agencies routinely report delinquent accounts to major credit bureaus. Every new creditor checks these national files before issuing anyone a new loan. If the applicant's monthly debt payments exceed between 28 percent and 36 percent of the applicant's monthly income, he or she probably will be rejected by the creditor. Higher interest rates on mortgages. Even if the would-be borrower manages to get approved for a new loan, a bad credit record means he or she probably will pay a mortgage rate of 12 percent to 15 percent.