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LawSmart's Guide to Understanding Debt

Posted by Anonymous

Life is often stressful and overwhelming for a debt holder. Worry, anxiety and fear often color every part of a debt holder's life and the debtor has trouble thinking about anything other than the money that he or she owes to creditors. For these reasons, it is important to confront the debt and create a legal plan to deal with the financial future.

Potential debtors who are still at the stage of deciding whether or not to go into debt should understand the different kinds of loans available and the legal implications of agreeing to borrow money from different types of creditors. Potential and current debtors should also understand the importance of their credit score and how that score is calculated. Debtors who are having trouble repaying their loans have several options available to them including being free from creditor harassment and engaging in credit counseling or debt management plans. Finally, debtors need to be aware of legal action that they can proactively take, such as bankruptcy, and actions that may be taken against them, such as lawsuits, to collect an unpaid debt.

In order to ease their stress and plan for their financial future, debtors should understand:

  • The Consequences of Signing a Loan Secured by Collateral: if you secure a loan with collateral such as your house, your car or your boat then the lender has the right to foreclose on the property if you fail to repay the loan according to the terms of the loan. In other words, your mortgage lender can foreclose on your home and you could lose title and possession of your home or the owner of your auto loan could repossess your car if you fail to make your car payments. If the value of the collateral is not enough to repay the loan then the creditor can usually sue the borrower for the difference that is owed. Secured loans generally have priority over unsecured debts, such as credit card debt, if a borrower files for bankruptcy.

  • The Consequences of Signing a Credit Card Agreement or Promissory Note: a credit card agreement or promissory note is a contract. You are obligated to repay the money that you borrow according to the terms of your contract. If you default on those obligations then your lender may seek a legal judgment against you. If you file for bankruptcy then unsecured creditors are entitled to be paid after your secured creditors and priority claims have been satisfied.

  • Credit Scores and How They are Calculated: A credit score is a number that indicates whether you are likely to be a good credit risk or a bad credit risk. Low credit scores can affect your ability to get loans and can cause you to pay a high interest rate if you do get a loan. Typically, your payment history is the most important factor in determining your credit score. Other factors may include the amount of your outstanding debt, the length of your credit history and how many loans or credit cards you have recently applied for. You can request a free credit report annually from the three major credit bureaus: Equifax, TransUnion and Experian. Your credit score is available for a fee.

  • The Right to be Free from Creditor Harassment: Creditors have a right to collect the money that is owed to them but they do not have the right to harass borrowers. The Fair Debt Collections Practices Act prohibits creditors from harassing debtors to collect the money that is owed and provides debtors with a legal cause of action if a creditor does resort to harassment as defined by the Act. For example, creditors may only contact you by telephone between the hours of 8 am and 9 pm. Creditors may not contact you in any way other than through litigation after you have provided them with written notice that you do not wish to be contacted about a debt. Similarly, creditors cannot contact you at work if you have advised them not to and they cannot contact you directly if you are represented by an attorney. It is never acceptable for a creditor to harass you, threaten you or publicly embarrass you. You have standing to file a lawsuit against any creditor who violates your rights.

  • Credit Counseling and Debt Management Plans: professional credit counselors can work with debtors to create a debt management plan to get out of debt and manage finances in the future. Individuals who file for bankruptcy are usually required to have participated in credit counseling within six months of filing bankruptcy. The credit counseling must be conducted by someone in the Department of Justice's U.S. Trustee Program, unless bankruptcy is being filed in Alabama or North Carolina where a different system of approved credit counselors exists. You should expect that your pre-bankruptcy credit counseling will include a review of your assets and liabilities, a discussion of bankruptcy alternatives and a personal budget plan. In most cases you will be required to file a certificate of credit counseling completion when you file for bankruptcy.

  • Bankruptcy: if you do not have the money to repay your debts and cannot work out other repayment arrangements with your creditors, then bankruptcy may be your only option. You have to file bankruptcy with the U.S. Bankruptcy Court for the jurisdiction in which you live. Individuals may file for Chapter 7 or Chapter 13 bankruptcy protection depending on their circumstances and long term goals. In a Chapter 7 proceeding, the bankruptcy trustee will collect and sell all of your nonexempt assets and use the proceeds to pay your creditors in a predetermined order determined by the bankruptcy code. In a Chapter 13 proceeding, a repayment plan is negotiated that has the debtor repaying his renegotiated debts over a 3 -5 year period. While bankruptcy is designed to give debtors a fresh start, the courts take special precautions to make sure that only debtors who truly cannot pay their bills are eligible so as to prevent abuse. When making the decision about whether or not to file bankruptcy it is important to remember that bankruptcy can affect your credit score for up to 10 years and that it is much more difficult to obtain a mortgage or other type of loan with a bankruptcy on your record.

 

If you are living with the stress and anxiety of debt that you cannot repay then the very worst thing that you can do is pretend that the debt is not there. Instead, contact your creditors and consider the options and consequences described above so that you can make a well reasoned decision that is best for you and your family.

 

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