Unsecured Debt Laws

Secured debts are debts you hold in which the creditor holds a legal stake in something you own as collateral. Unsecured debts, however, have no form of collateral. Because of this, they are much riskier for lenders. Although less of a risk for consumers than the secured variety, these debts can easily end up costing more over time in fees and interest rates.

Interest Rates

Interest rates are typically much higher on unsecured debt than on secured debt to offset the risk of nonpayment. Legal limits to the amount of interest you can be charged vary by state, but lenders of unsecured debt only have to abide by their state's interest limits, not yours. This is why you may notice the headquarters of many credit card companies located in states such as Delaware or Nevada, where there are no limits placed on the amount of interest a company can charge.

Fees

Creditors provide the service of extending credit to those who need it. They also charge handsome fees for doing so. Some examples of these fees are annual fees on credit cards, cash advance fees, and late payment fees. Until 1996, federal laws placed a cap on the amount of fees a credit card company could charge a consumer. In Smiley v. Citibank, that law was stricken from the books, and credit card companies were free to charge whatever they wished for the very first time. Credit card fees have been on the rise ever since.

Credit Reports

Creditors must keep your unsecured debt record accurately updated on your credit report. If you notice mistakes, contact your creditors immediately and ask them to correct the information. You can also contact the credit bureaus and request an investigation in order to have the mistake corrected. The Fair Credit Reporting Act stipulates that credit bureaus must conduct a full investigation if you request one. You are entitled to fair and accurate credit reporting since a good credit report can be crucial to your financial security.

Collections

If you cease to make payments on your unsecured debt, you can expect it to be sent to a collections agency. Transferring or selling the debt does not alter its unsecured status. Collection agencies are legally allowed to contact you about the debt via telephone or mail unless you request in writing that this contact cease. Creditors also have the right to file a lawsuit against you and usually will if the debt you owe is large enough. Federal law strictly prohibits debt collectors from harassing you or your family. Most states also require that debt collection agencies possess a valid state license in order to pursue collection activity against the residents of that state.

Legal Action

If you default on an unsecured debt, your creditor cannot come and take your home or your car. What a creditor can do is take you to court to recover the money you owe, plus fees. Each state places a legal statute of limitations on the amount of time a creditor has to take legal action against you to recover a debt. If the creditor wins the lawsuit, you will have a judgment levied against you that will appear on your credit report. You may also have your wages garnished if you live in a state that permits it. If you ever receive a court summons over unpaid unsecured debt, check the statute of limitations for your state. The debt very well may have already expired.