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Different Types of Debt

Debt comes in all shapes and sizes. You can owe money to utility companies, banks, credit card providers, and the government. There’s student loan debt, credit card debt, mortgage debt, and much more. But what are the official categories of debt and how do the payoff strategies for these debts differ?

Categories of Debt

Debt is generally categorized into two simple forms: Secured and Unsecured. The former is secured against an asset, such as a car or loan, and means the lender can seize the asset if you fail to meet your obligations. Unsecured is not secured against anything, reducing the creditor’s control and limiting their options if the repayment terms are not met.

A secured debt provides the lender with some assurances and collateral, which means they are often prepared to provide better interest rates and terms. This is one of the reasons you’re charged astronomical rates for credit cards and short-term loans but are generally offered very favorable rates for home loans and car loans.

If the debtor fails to make payments on an unsecured debt, such as a credit card, then the debtor may file a judgment with the courts or sell it to a collection agency. In the first instance, it’s a lot of hassle without any guarantee. In the second, they’re selling the debts for cents on the dollar and losing a lot of money. In either case, it’s not ideal, and to offset this they charge much higher interest rates and these rates climb for debtors with a poorer track record.

There is also something known as revolving debt, which can be both unsecured and secured. Revolving debt is anything that offers a continuous cycle of credit and repayment, such as a credit card or a home equity line of credit. 

Mortgages and federal student loans may also be grouped into separate debts. In the case of mortgages, these are substantial secured loans that use the purchase as collateral. As for federal student loans, they are provided by the government to fund education. They are unsecured and there are many forgiveness programs and options to clear them before the repayment date.

What is a Collection Account?

As discussed above, if payments are missed for several months then the account may be sold to a debt collection agency. This agency will then assume control of the debt, contacting the debtor to try and settle for as much as they can. At this point, the debt can often be settled for a fraction of the amount, as the collection agency likely bought it very cheaply and will make a profit even if it is sold for 30% of its original balance.

Debt collectors are persistent as that’s their job. They will do everything in their power to collect, whether that means contacting you at work or contacting your family. There are cases when they are not allowed to do this, but in the first instance, they can, especially if they’re using these methods to track you down and they don’t discuss your debts with anyone else.

No one wants the debt collectors after them, but generally, you have more power than they do and unless they sue you, there’s very little they can do. If this happens to you, we recommend discussing the debts with them and trying to come to an arrangement. Assuming, that is, the debt has not passed the statute of limitations. If it has, then negotiating with them could invalidate that and make you legally responsible for the debt all over again.

Take a look at our guide to the statute of limitations in your state to learn more.

As scary as it can be to have an account in collections, it’s also common. A few years ago, a study found that there are over 70 million accounts in collections, with an average balance of just over $5,000.

Can Bankruptcy Discharge all Debts?

Bankruptcy can help you if you have more debts than you can repay. But it’s not as all-encompassing as many debtors believe.

Chapter 7 bankruptcy will discharge most of your debts, but it won’t touch child support, alimony or tax debt. It also won’t help you with secured debts as the lender will simply repossess or foreclose, taking back their money by cashing in the collateral. Chapter 13 bankruptcy works a little differently and is geared towards repayment as opposed to discharge. You get to keep more of your assets and in exchange you agree to a payment plan that repays your creditors over 3 to 5 years.

However, as with Chapter 7, you can’t clear tax debts and you will still need to pay child support and alimony. Most debts, including private student loans, credit card debt, and unsecured loan debt will be discharged with bankruptcy.

Bankruptcy can seriously reduce your credit score in the short term and can remain on your credit report for up to 10 years, so it’s not something to be taken lightly. Your case will also be dismissed if you can’t show that you have exhausted all other options.

Differences in Reducing Each Type of Debt

The United States has some of the highest consumer debt in the world. It has become a common part of modern life, but at the same time, we have better options for credit and debt relief, which helps to balance things out a little. Some of the debt relief options at your disposal have been discussed below in relation to each particular type of long-term debt.

The Best Methods for Reducing Loans

If you’re struggling with high-interest loans, debt consolidation can help. A debt consolidation company will provide you with a loan large enough to cover all your debts and in return, they will give you a single long-term debt. This will often have a smaller interest rate and a lower monthly payment, but the term will be much longer, which means you’ll pay much more interest overall.

Debt management works in a similar way, only you work directly with a credit union or credit counseling agency and they do all the work for you, before accepting your money and then distributing it to your creditors.

Both forms of debt relief can also help with other unsecured debts. They bring down your debt-to-income ratio, leave you with more disposable income, and allow you to restructure your finances and get your life back on track.

The Best Methods for Reducing Credit Cards

Debt settlement is the ultimate debt relief option and can help you clear all unsecured debt, with many companies specializing in credit card debt. 

Debt settlement works best when you have lots of derogatory marks and collections, as this is when creditors are more likely to settle. They can negotiate with your creditors for you and clear your debts by an average of 40% to 60%. You just need to pay the full settlement amount and the debt will clear, with the debt settlement company not taking their cut until the entire process has been finalized.

A balance transfer can also help with credit card debt. A balance transfer credit card gives you a 0% APR on all transfers for between 6 and 18 months. Simply move all of your credit card balances into a new balance transfer card and then every cent of your monthly payment will go towards the principal.

The Best Methods for Reducing Secured Debts

Secured debt is a different beast, as your lender can seize the asset if they want to. This makes them much less susceptible to settlement offers and refinancing. However, they will still be keen to avoid the costly foreclosure/repossession process, so contact them as soon as you’re struggling and see if they can offer you anything by way of a grace period or reduced payment.

Most lenders have some form of hardship program and are willing to be flexible if it increases their chances of being repaid in full.

Different Types of Debt is a post from Pocket Your Dollars.

Source: pocketyourdollars.com

All About the Statute of Limitations on Debt

All About the Statute of Limitations on Debt

Paying off debt can be an excruciating process, depending on how much money you owe. But your debts may not haunt you forever. Most consumer debts have a statute of limitations. That means that after a certain amount of time has gone by, collectors can’t sue you for failing to pay off outstanding debts. Here’s everything you need to know about the statute of limitations on debt.

See how long it’ll take to pay off your credit card debt.

Understanding the Statute of Limitations on Debt

You can be taken to court for not paying off certain debts. But there’s a limit on how long debt collectors can chase after the borrowers they want to sue.

The period in which someone can take legal action against you for owing money is known as the statute of limitations. In many cases, that time period either begins on the date you last made a payment or when your account becomes delinquent (which usually happens 30 days after a borrower fails to make a payment). But sometimes, the statute of limitations begins whenever you last used the account, acknowledged that you owed debt or agreed to make a payment (more on that later).

Statutes of limitations offer consumers with old debts some protection from debt collection agencies. After the statute of limitations on a debt expires, that unpaid debt is considered to be time-barred. At that point, borrowers no longer have a legal obligation to pay off their debts.

Different states have different statutes of limitations. And there are different rules attached to different types of debts. In Iowa for example, the statute of limitations on credit card debt is 10 years. In Alaska, Alabama and Washington D.C. it’s only three years.

Not all consumer debts have a statute of limitations, however. Federal student loans, for example, haven’t had a legal expiration date for over two decades.

What to Do With Time-Barred Debts 

All About the Statute of Limitations on Debt

While you may no longer be legally responsible for your time-barred debts, you’re not totally off the hook. Most negative credit information – like unpaid debts – can stay on your credit report for up to seven years. But tax liens can remain on your credit report for up to 15 years and bankruptcies can be reported for 10 years.

Not repaying the old debt you owe after the statute of limitations expires could hurt your credit score. And you could have a hard time trying to buy a house or take out a new loan.

Related Article: The Worst Ways to Deal With a Bill Collector

If you decide to pay off an old debt, it’s important to make sure you have documentation confirming that the debt is yours before making a single payment. You may have to pay off your debt in full in order to avoid restarting or extending the statute of limitations on your debt. So talking to a lawyer before making a single payment is a good idea.

When a Collector Asks About Your Time-Barred Debt

Even though you can’t be sued for your time-barred debts, a debt collector may try to come after you anyway. Bill collectors are required to follow certain rules under the Fair Debt Collection Practices Act (FDCPA). But they have the right to contact you even after the statute of limitations on a debt runs out. If a debt collector threatens to sue you for a time-barred debt, he or she could be violating the FDCPA.

Statutes of limitations can be tricky. So if you’re not sure whether your debt is past its legal expiration date, it’s a good idea to ask a debt collector who contacts you if your debt is time-barred. If he or she says no, it’s best to ask for the date of the last payment and request written proof that the debt they’re trying to collect is actually yours.

You’ll need to be careful when speaking to debt collectors, especially when dealing with a debt you believe is time-barred. If you say the wrong thing, the statute of limitations could be restarted or extended and you could end up having to pay a bill collector what you owe. The debt collector could also sue you and win.

The clock on your debt can restart if you admit to owing a debt, promise to start paying it or attempt to start repaying it by sending money to a debt collector. But the guidelines associated with extending and restarting the statute of limitations vary depending on where you live.

Related Article: Understanding Debt

Final Word

All About the Statute of Limitations on Debt

If you don’t know if the statute of limitations on your debt has expired, you can check with someone from a local legal aid society, an attorney or your state attorney general’s office. Or you can figure it out yourself by finding out when the statute of limitations begins and looking up your state’s laws regarding the statute of limitations on debts.

After you can confirm that the statute of limitations on your debt has in fact expired, you’ll have to decide what to do with it. You can pay off the debt and improve your credit score or ignore it and wait until it disappears from your credit report. You could also dispute the old debt or try to work out an agreement so that you end up paying less than what you owe your creditor.

Photo credit: ©iStock.com/Geber86, ©iStock.com/fstop123, ©iStock.com/ozgurdonmaz

The post All About the Statute of Limitations on Debt appeared first on SmartAsset Blog.

Source: smartasset.com