Consumers use credit to purchase a variety of items. A secured debt is debt that is associated with a tangible item, such as a home or car. Unsecured debt is debt that is extended by the lender but is not attached to a specific item, such as a credit card. In either case, there are consequences if you do not repay the debt.
Significance
An unsecured loan is based on a contract between the lender and the borrower. If the loan is for an item, such as a car or home, the lender can repossess the item then sell it to offset the amount due. Since unsecured debt has no such tangible property associated with it, if you default on that obligation, the lender may exercise its right to sue you in court to recoup the payment of that debt.
Effects
If a creditor successfully sues you, that creditor will get a judgment against you for a specific dollar amount. That judgment allows the creditor to pursue various collection channels against you. The creditor may garnish your wages, garnish the funds in your bank account or place a line on property that you own. Keep in mind that the statue of limitations of judgments varies from state to state and can follow you for many years. In Florida, a judgment holder can pursue collection of that debt for up to 20 years.
Considerations
Under the Fair Credit Reporting Act (FCRA), the statue of limitations for bad debt to appear on your credit report is seven years. Exceptions are Chapter 7 and 11 bankruptcy, which remain for up to 10 years, and non-discharged or dismissed Chapter 12 and 13 bankruptcy, that remain for up to 10 years. Also, unpaid tax liens remain on the report indefinitely in all states except California, where it remains for up to 10 years.
Prevention/Solution
According to the Federal Trade Commission, it's not necessary to hire someone to negotiate debt on your behalf. Debt settlement companies charge fees for their services. Although debt settlement companies may claim that they can achieve settlements on your behalf, according to the FTC, creditors are not obligated to accept settlements on any debt. The creditor does so at its own discretion and therefore, you may be required to pay the full amount. Instead of hiring someone, you can contact the creditor yourself to work out possible payment arrangements.
Warning
According to Forbes, consumers should watch out for zombie debt. Zombie debt refers to debt that has passed the state's statute of limitations and therefore, you're no longer legally responsible for it. However, collection agencies purchase zombie debt and may try to get you to pay it. Also, depending upon the dollar amount, the agency can sue you in court. If you appear and inform the judge that the debt has expired, the judge will dismiss the suit, but if you fail to show, the agency will receive a default judgment against you. You are now legally responsible for that debt and the creditor can pursue collection activity against you to collect it.
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