Paying Off Debt

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 What is Debt?

When an individual has debt, it means they owe money to someone else. An individual who owes money is called a debtor.

The party to whom the money is owed is called the creditor. Creditors are often lending institutions, such as banks or credit card companies.

An individual’s debts may also involve other types of assets, such as property interests.

What is Consumer Debt?

Consumer debt is debt that is owed by an individual rather than by an organization or a business. In other words, personal debt is owed by regular individuals.

This type of debt often comes in the form of a fixed-payment loan or when an individual makes charges to their credit cards, which creates credit card debt. Payday loans are also an example of consumer debt.

This type of debt is the category of debt that the majority of individuals are familiar with. Consumer debt includes both personal debts and debts that are incurred for the purpose of meeting living expenses.

Common forms of consumer debt include:

  • Mortgages, or home loans: For many individuals, this is their largest amount of debt;
  • Credit card debt: Many individuals have card with high interest rates and spend outside their means on those cards, compounding the issue;
  • Student loans: Student loans are non-dischargeable in bankruptcy proceedings, so they often remain as an expense over many years;
  • Bank loans and overdrafts: Bank loans are commonly used for large, one-time expenditures such as a vehicle purchase or home improvements. However, they often involve payback plans extended over long periods of time.

In many cases, consumer debt arises when an individual purchases goods that do not appreciate in value over time. This may include items such as clothing, which typically does not increase in value.

In addition, automobile loans account for a large portion of consumer debt in the United States. It is important to note that there is a difference between goods that do not appreciate in value and goods which are considered to be investments.

For example, student loans may not always qualify as a consumer debt because they are considered an investment in an income increase in the future.

What are Some Legal Issues Related to Consumer Debt?

There are instances when individuals take on more consumer debt than they are able to handle. When an individual’s consumer debt gets out of control, there are several legal issues that may arise, including:

  • A breach of contract;
  • A property lien; and
  • Bankruptcy.

When an individual signs up for a credit card or takes out a loan for a home or a vehicle, they sign a contract. If the individual is not able to make payments as they agreed to in the contract, they may default on their obligations to the lender.

When this occurs, the debtor has breached the contract. In certain situations, overspending and consumer debt is the main or sole cause of personal bankruptcy. For example, consumer debt may not leave enough room in an individual’s budget for them to purchase any additional necessary expenses, such as emergency medical treatments.

Filing for consumer bankruptcy may help to alleviate some of an individual’s debts. In certain cases, there are certain types of debt, such as medical bills, that may cause an individual to have to file for bankruptcy.

The legal consequences of debt will be determined by what type of debt is involved, whether it is secured or unsecured. Secured debt is debt related to real or personal property that a creditor will be permitted to seize in the event that the loan enters default status, or if the individual is not able to make their payments.

Secured debt commonly involves a home or car loan. The security on these loans is the home or vehicle, which the individual has pledged to use as collateral for the loan they obtained.

In certain situations, a credit organization or other lending institution may take hold of the individual’s personal or real property using a property lien. A property lien allows a lender to take title of the property because of the missed payments.

Unsecured debt is debt that does not involve any type of property that is used as collateral, or security, on the loan. Because of this lack of collateral, a creditor is initially prevented from reaching any of the debtor’s assets as payment for that loan.

Therefore, a creditor will typically be forced to resort to other means of collection, such as hiring an independent collections agency or filing a lawsuit in court. The most common type of unsecured debt is credit card debt.

What Options Do I Have for Paying off Debt that is Accumulating Interest?

Whether an individual’s debt is in credit cards or loan payments, any type of debt that has interest built into may be very difficult to pay off because the longer the debt lasts, the more interest it accumulates. One basic strategy for stopping an accumulation of debt, other than cutting up credit cards, is to make more than just the minimum payment on the bill.

There are some other strategies an individual can use to reduce interest payments and help fully pay off their debt, including:

  • Transfer debts to the lowest interest credit card: If an individual has multiple credit cards, take a close look at the one that has the lowest interest rate. If it is not maxed out, they may want to consider converting bills that are on higher interest cards to this card;
    • This will reduce the amount of interest that is accumulated monthly on the bill. If the card maxes out before an individual can combine all of their other higher interest bills onto it, start using the card with the next lowest interest rate until it too has been maxed out;
  • Use liquid assets to pay off your debt: This means using the money in an individual’s savings account and cashing in their stocks and other securities to pay off that loan;
    • The rate of growth of these assets will never match the rate of growth of the debt. An individual should not hold off on using their assets to pay off their debt because having paid off some or most of the debt so that the interest payments are decreased is well worth the assets the individual will be losing; and
  • Take out loans with cheaper interest rates than the credit cards to pay off debt: This can be a loan against an individual’s life insurance, a home equity loan, or even a loan on their 401(k) plan. This makes paying off debt much easier since now the individual will not be paying as much in interest rates;
    • It is important for an individual to keep their credit cards paid off until they have repaid the other loans.

Should I File for Personal Bankruptcy if My Debts Become Overwhelming?

Personal bankruptcy should always be considered the absolute last resort for dealing with debts. It should only be filed if it is impossible for an individual to pay off their debts.

This is because there may be severe consequences for declaring bankruptcy. For example, an individual may have trouble getting any kind of credit for the next 10 years.

In addition, in bankruptcy, an individual will also either lose some of their property or control of their finances depending on what type of bankruptcy they have filed. It can also be costly to file for bankruptcy.

Should I Consult an Attorney before Filing for Bankruptcy?

It is very important to consult with a credit attorney before deciding to file for bankruptcy. Filing for bankruptcy is not a choice to be made lightly.

Your attorney can advise you regarding your options for paying off your debt and can help determine whether it would be necessary for you to file for bankruptcy. If you do decide bankruptcy is the best choice in your situation, your attorney can advise you regarding what chapter of bankruptcy to file as well as guide you through the process.

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