If you’ve gotten behind in paying your bills or a creditor’s records mistakenly make it appear that you are behind, there’s a good chance your debt will be turned over to a debt collector. This classroom goes over your rights as a consumer when dealing with debt collectors, including how to make them stop contacting you and what to do if you disagree with the debt. It will not deal with how to handle a debt collection lawsuit. If you are being sued for a debt, you should contact a lawyer.
Types of Debt
When you stop paying your debts, the company that you owe money to—or in other words, the creditor—can take certain steps to collect the debt. The way a creditor goes about collecting on bad debts depends on the type of debt it is. In general, there are two types of debts: secured or unsecured.
A secured debt is a debt where the borrower has to put up collateral, for instance, a car or home, to “secure” the debt. This means that when you stop paying on a secured debt, the creditor can take the collateral and sell it as a way to pay itself back. A car loan is an example of a secured debt – if you quit making loan payments, the lender can repossess your car to pay back the loan. Sometimes, depending on the law and the type of property, a creditor can still come after you for the remaining balance if the property is sold for less than the debt.
Unsecured debt is secured by nothing but your promise to pay the creditor back. An example of an unsecured debt is a credit card.
What happens when you stop paying a debt? In general, the creditor begins the collection process with a series of letters, and then phone calls. If the debt is secured, it may then be sent for repossession or foreclosure. If the debt is unsecured, it may be referred to a collection agency or to a lawyer. When your debt goes into collections, you have certain rights as a consumer. The next lesson goes over your rights under the federal Fair Debt Collections Practices Act, or the FDCPA.