Dealing with Debt

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By: LawInfo

Published: 08/2009

Dealing with finances is never easy, and for all too many Americans, debt problems have become a major issue in their lives. With the current economic crisis, rising unemployment rates, and steadily increasing costs of living, many people are experiencing the positive and negative effects of credit, debt, and the contracts that are created as a result of financial transactions. Whether you are juggling your bills in an attempt to keep ahead of your creditors, or you find yourself in a position where some debts must go unpaid, you must be aware of your legal rights and responsibilities with regard to your finances.

Debts and Contract Law

All financial transactions create legal contracts involving both the creditor and debtor. Taking out an auto loan, borrowing money to buy a home through a mortgage lender, and becoming approved for a new credit card are all examples of entering into contracts that give you, the debtor, certain rights, but that also give your creditors certain rights if you fail to live up to your contracts. Any violation of such contracts on your part can have serious consequences. Therefore, it is essential that you make yourself aware of these consequences, particularly before taking on additional debts.

Issues to Consider

As you consider your current finances, particularly in terms of your existing debt, you should ask yourself the following questions:

What are my obligations for taking out any sort of loan or line of credit?
How will late bill payments or unpaid bills affect my credit score?
What rights do I have as creditors begin contacting me about unpaid debts?
What will be the effect of a lawsuit and/or judgment against me as a result of an unpaid debt?
Do I have any other recourse for dealing with debt other than filing for bankruptcy?
Is filing for bankruptcy an essential or potential option for dealing with my debts?

Once you have discovered the answers to these essential questions, you will be able to better deal with your finances and debts, and reach the solutions that are best for you and your family.

Your Responsibilities When You Borrow Money

If you choose to purchase some item that you cannot afford to pay for in cash, you take on certain responsibilities as a result of borrowing money from a bank or other financial institution. When you enter into a loan, you become obligated to that creditor to repay the loan, at a specified rate of interest, according to the payment scheduled to which you agreed. Whether you have opened a new credit card account, signed a promissory note on a home loan, or purchased a new automobile on a line of credit, you have promised to pay the creditor according to the terms set by your contract, which, in turn, are often affected by your credit score or rating.

Debt and Your Credit Score

The credit industry assigns a risk value to you as a debtor based on your past credit history, which directly affects your ability to obtain credit, whether it is in the form of a mortgage, an auto loan, or a credit card. Simply put, if you have always paid your bills on time and in full, you are a better risk for a bank than a person who has a history of not paying his or her bills. Therefore, a person with a higher credit score is likely to be rewarded with better contract terms, such as lower interest rates, lower payments, and higher credit limits, than a person with a negative credit history. As a result, it is important to keep in mind that the credit card account on which you defaulted at the age of nineteen is likely to reappear and have a negative effect on your credit score when you are ready to purchase your first home, even ten years later.

Your Rights as a Debtor

There may come a time in your life, however, when you are unable to pay some or all of your bills in a timely fashion. Unemployment, health problems, and divorces can all intervene and cause financial problems that you never expected. In this situation, you should be aware of the Fair Debt Collection Practices Act (“FDCPA”) and the rights that it gives you, even if you are unable to pay your bills. The FDCPA prevents creditors from harassing you regarding unpaid debts, by doing such things as calling you at work and threatening you. Therefore, the FDCPA is an important tool in preventing unwanted and unneeded stress that you might already be feeling as a result of your financial situation.

Consequences for Breaking a Contract

If you are unable to pay your bills for a period of time, though, it is likely that you have broken the contracts under which you agreed to pay for certain items. Breaking legal contracts does give creditors remedies against you for your failure to pay, including suing you in court if you break a contract by not making your payments as agreed. If you have purchased an item that secures a loan, such as a vehicle or a new stereo system, the creditor has the right to not only sue you, but also to legally repossess the item securing the debt. Likewise, if you default on a mortgage loan, you could be subject to a mortgage foreclosure action, which results not only in a judgment against you that you must repay, but the loss of your home altogether. Again, any sort of legal action, repossession, foreclosure, and/or judgment against you will negatively affect your credit score, perhaps for years to come.

Alternatives to Bankruptcy

Fortunately, there are some solutions to your debt problems, which may differ according to your situation. Credit counseling may be helpful to you as you begin to sort out your debts, and get you back on track to paying your bills. Some credit counseling agencies also offer debt management plans, by which you make certain payments to the agencies, who, in turn, negotiate with your creditors and apply your payments toward your debts. Keep in mind, however, that for-profit credit counseling agencies are not all legitimate, and you’ll want to investigate such an agency thoroughly before using its services.

Filing for Bankruptcy

Finally, for people facing massive debts with no realistic hope of repayment without court intervention, bankruptcy is an option. Obtaining a Chapter 7 bankruptcy discharge essentially erases all of your qualified debts, with the exception of certain priority debts such as income taxes, student loans, and child support. You might also file for a Chapter 13 bankruptcy discharge, which sets up a long-term payment plan in order to satisfy your debts in part or in full, as overseen by an appointed bankruptcy trustee. In either case, however, you may be able to retain some assets that are exempted from the bankruptcy process, which will help permit you to begin rebuilding your life in spite of your finances.

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