Table of Contents
- What Are Netting Escrows & How Does It Work?: The Best Guide - January 2, 2024
- The Secret About Prescriptive Easement: Top Guide 1 Must Know - December 4, 2023
- About Home Equity Loans In Texas And How Can One Obtain It - November 27, 2023
About Consumer Debts
Debt, in simple terms, is the amount of money you borrow from another party called ‘lender’.
A lot of individuals and corporations use debt as a means of making purchases they could not have afforded under ordinary circumstances.
The arrangement of the debt allows borrowers to borrow money with the condition of paying it back later with interest accrued at a particular rate that depends on various factors like the amount of debt, term of the debt, collateral, etc.
Types of Debts
Everyone at some point in their lives encounters some type of debt. Every debt type is different from another and some are also considered better in comparison.
Although there are different types of debts, all of these personal debts can be grouped into some main types like secured debts, unsecured debts, revolving debts, and mortgages.
- Secured Debts– A debt that is backed by an asset as ‘collateral’ is a secured debt. Lenders usually require a credit check to assess the borrower’s debt and repayment history. In case the borrower defaults on the repayment of the debt, the lender can seize the collateral.
- Unsecured Debt– A debt that has no collateral assigned, is an unsecured debt. Here the borrower is required to repay the debt amount by use of a contractual agreement and if he/she defaults, the lender can then move to court to claim the money owed. However, this costs the lender, and thus unsecured debts usually have higher interest rates.
- Revolving Debt– This is an agreement between the borrower and the lender that allows the borrower to draw or borrow an amount up to a particular limit, on a regular basis. A credit card and line of credit are examples of revolving debt. Revolving debts can be secured (Home equity line of credit) as well as unsecured (credit cards).
- Mortgages– A mortgage is a loan borrowed for the purchase of a home. Mortgages require the assigning of the home or property in question as collateral for the loan. The interest on a mortgage is usually deductible from tax and often has the lowest rate compared to other loan products. Mortgages come with 15 or 30-year terms to help keep the monthly payments affordable for the borrowers.
Good Debt vs Bad Debt
Although the best option is to not have any debt at all, some debt types are worse than other debts.
A debt acquired for the purchase of something that grows in value, for example, college education or a home, is usually considered to be better than other types of loans.
The interest on these debts is also deductible from taxes for the majority of borrowers. Other types of debts like personal loans, car loans, or credit cards generally have much higher interest rates which are also not deductible from taxes.
Thus, these types of debts are considered as being the least beneficial to borrowers.
How much Debt is ‘Too much’?
Though the amount of debt that you can borrow depends upon your financial condition, a general rule of thumb says that you should let your monthly payments, including the credit card, car payments, student loans, and other installments (excluding your mortgage) be more than 15-20% of your income.
The Truth About Debt Collectors
You may get a phone call from a debt collector in case you have unpaid debts or have become irresponsible.
These professionals that are highly trained, have 2 weapons: ignorance and fear. A lot of people are terrified of the midnight calls or the embarrassment that follows workplaces confrontations even though these are just threats.
However, these tricks or practices of the debt collectors are in fact illegal.
It can be scary being pursued by debt collectors, though it does not have to be so if you understand your rights and limitations that are put on the collection agencies.
Handling Debt Collection Phone Calls
Your first line of defense when dealing with a debt collector is knowing what you should say and what you should not.
Do not let a call from a debt collector catch you with your guard down and be sure to ask the collector the following questions:
- The name of the caller.
- The name of the agency the caller works for.
- The name of the creditor.
- The amount that the lender claims you owe.
Make sure you get as much information about the caller as possible while also ensuring that you do not give out any information about yourself.
You can ask the caller to send a letter to you that states the amount you owe and end the conversation.
The legitimate caller will already have your address and if not, you should avoid giving it to them.
Handling Debt Collection Letters
If a debt collector contacts you through a letter, it should contain the details of the debt.
You can write back, and not call, asking for the details if they are not mentioned in the letter and it seems to be vague.
Make sure you attach a copy of the letter you got and refrain from giving any information about yourself. Also, be sure to send the letter using a service that requires the signature of the receiver.
This way you can have an accurate record of the interactions and the agency can not deny having received your letters.
The collection agency is more likely to treat you with fairness if you make it clear to them that you know your rights.
They may even leave you alone if it was a bogus threat, knowing you are not going to be an easy target.
Know your Rights
The Federal Trade Commission (FTC) created the Fair Debt Collection Practices Act (FDCPA) to abolish deceptive, abusive, and unfair debt collection.
The act gives consumers considerable rights and has guidelines that the debt collectors are required to comply with legally.
Here are some of the rights mentioned in the Act:
- The debt collector must state, upon the first contact with you, if that contact is verbal, “that the debt collector is attempting to collect a debt and that any information obtained will be for that purpose.”
- If you hire an attorney, the debt collection agency must communicate only with your attorney, not directly with you, unless the attorney does not reply to the debt collector or gives the debt collector permission to contact you.
Reporting Debt Collection Abuse
The only defense of a debt collection agency in case of bad behavior, under the FDCPA, is proving they made an error.
This documentation is going to be essential if you are planning on filing a complaint or lawsuit.
File a complaint with the FTC and take action against any dubious debt collection practice. Make sure you mention the details of the abusive behavior in your complaint.
