Dealing With Debt: An Overview of Your Options
Tips for dealing with creditors when you can't pay your bills and past due debt.
In these tough economic times, many Americans are struggling to pay their debts. Whether you are barely holding on or the debt collectors have already come knocking, the best strategy is to take stock of the situation and come up with a plan as soon as possible.
When it comes to dealing with debt you can't pay, you do have options -- creating a budget and contacting creditors yourself, seeking help from a credit counseling agency, entering into a debt management plan, or filing for bankruptcy, among other possibilities. Here's an overview of the most common ways to take control of your debt and tips on what to look out for when seeking help from credit counselors or debt management plan services.
What Happens When You Can't Pay Your Unsecured Debt?
If you're struggling to pay bills and want to understand your options, it helps to first learn what kind of debt you have -- and what will happen if you don't pay it.
Unsecured v. Secured Debt
Debt can generally be divided into two categories: secured and unsecured.
A debt is secured if a specific item of property (called collateral) is used to guarantee repayment of the debt. If you don't repay a secured debt, most states let the creditor take the property without first having to sue you and get a court judgment. Examples of secured debt include mortgages and home equity lines of credit (which are secured by your home), and car loans (which are secured by your vehicle).
Debt is considered unsecured when it is not tied to a particular piece of property. If you don't pay an unsecured debt, the creditor must sue you and get a court judgment before it can take your wages or property to get paid. Examples of unsecured debt include medical bills and credit card debt.
Some debts deserve a special category: student loans and tax debt. Although these debts are not secured by property, the government is entitled to take more drastic collection procedures without having to first get a court judgment.
This article discusses what to do if you are struggling with unsecured debt (other than student loans and tax bills). For comprehensive information on what to do if you can't pay your mortgage, see Nolo's Foreclosure topic. If you have student loans or tax bills, see Nolo's Student Loan & Tax Debt topic. If you have other secured debt, you can still negotiate or work out a payment plan with the creditor, but be aware that the collateral (for example, your car) may be in jeopardy of getting repossessed. To learn more about secured debts and repossession, see Nolo's article Repossession: What Creditors Can and Can't Take.
If You Don't Pay Your Unsecured Debt
Sometimes people don't have any way to pay their bills or can't work out a payment plan with their creditors. If you go long enough without paying your debts, at least one of your creditors -- if not more -- will probably sue you to recover the money you owe. If the creditor gets a judgment against you -- which is the typical result -- it can then try to collect the money owed under the judgment by attaching your bank account, taking a portion of your wages, or taking other property. There are limits to what creditors can do and how much they can take.
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