To be “in debt” means that a persons owes something, usually money. The person who owes money is usually called the “debtor.” The party that is owed money is called the “creditor” and is usually a lending institution such as a bank. Debt may also involve other assets such as interests in property. 

What Are Some Different Types of Debt?

Debt may be categorized into two basic categories: consumer and corporate debts.

Consumer debt is the type that most people are familiar with. It consists of personal debts and debts incurred mostly in meeting living expenses. Some common types of consumer debt are:

  • Mortgages (home loans): For most people this is the largest amount of debt owed. With the recent housing crisis, many consumers have taken on debts well outside their planned budget
  • Credit Card Debt: High interest rates and overspending can lead to debt with credit card companies
  • Student loans: Educational debts cannot be forgiven in bankruptcy proceedings, so they often remain an expense over time
  • Bank loans/overdrafts: Bank loans are commonly utilized for one-time expenditures such as an automobile purchase or home improvements, but they often involve payback plans extended over long periods of time 

Corporations can also incur debts. Corporate debts may include:

  • Public debt: Debt that is freely traded in the public market, such as bonds
  • Private debt: This may involve debts with a bank or a similar private company
  • Syndicated debt: These are debts wherein one or more lending institutions collaborate to provide the principal amount loaned to the corporation

What Are the Legal Consequences of Being in Debt?

Dealing with the consequences of debt begins with determining whether the debt is secured or unsecured debt. Both consumer and corporate debts may be either secured or unsecured. 

Secured debt means that a creditor is allowed to take back some of the debtor’s personal or real property if the loan has entered default status (the debtor is unable to make monetary payments). Usually this involves a house or car loan. In this type of debt case the “security” on the loan is the debtor’s house or car, which they have pledged to use as collateral for the loan.

Unsecured debt does not involve any type of property being used as collateral or security on the loan. In this situation, the creditor is initially prevented from reaching the debtor’s assets as payment for the loan. Therefore, the creditor usually must resort to other means of collection such as hiring an independent collection agency or by filing a lawsuit in court. The most common form of unsecured debt is credit card debt.

What Laws Provide Protection from Creditors?

There are a variety of state laws in place to ensure that creditors do not treat their debtors unfairly. Under Federal law, the main statute regulating creditor collections is the Fair Debt Collection Practices Act (FDCPA). This act applies to the manner in which bill collectors are allowed to go about making collections. For example, they are prohibited from calling at certain hours and making threats in order to force a payment.

Do I Need a Lawyer?

Dealing with creditors can be challenging at times, and it often involves several different documents and deadlines. Hiring a lawyer can be advantageous, especially if you are dealing with unsecured debt that might lead to a lawsuit. Working with a lawyer can help ensure that your debts are dealt with in a manner that is both fair and timely.