What You Should Know About Debt & What Can Happen
If You Don’t Pay

The questions and answers below discuss some things you should know about debt before you attempt to take steps to improve your financial situation.

Questions and answers about debt and not paying debt:

1.   What should I know about debt? How are debts different and how do these differences affect me?

The nature of a debt dictates what steps creditors can take to try to collect it from you. For the purposes of this article, we will separate debt into four categories:

• Unsecured debt
   

• Secured debt
   

• Judgment debt
   

• Tax debt

Each category of debt provides specific collection remedies to creditors as well specific rights to those who owe the money (referred to as debtors). Debts must be further broken down as to whether they were incurred for personal reasons (consumer debt) or for business reasons (commercial debt). This distinction also affects the rights of the parties with regard to collection remedies.

2.   What is unsecured debt?

Unsecured debts are debts that provide no collateral and no special collection rights to the creditor. They are backed up by nothing more than a promise to pay. They generally come about when goods or services are purchased on open account or when money is borrowed without security. Examples of transactions resulting in unsecured debts are purchasing goods or services using a credit or a charge card, accepting fuel oil deliveries, running up utility charges, trash pickups, receiving doctor and hospital services.

3.   What can happen if I don’t pay an unsecured debt?

In a nut shell there are five (5) steps that a creditor can take in an attempt to collect an unsecured debt:
 

Step 1 - They can ask you to pay - Creditors can contact you by phone, fax, mail and even by email to try to convince you to pay. Their requests for payment may soon become demands and get progressively more threatening. Yet, no matter what creditors say or how strong they come on, all they can do is ask you to pay. They have no power at this point to force you to pay.
 

Step 2 - Certain creditors can cut you off - Because of the exclusive nature of their merchandise or services, a creditor may be able to force you to pay by threatening to stop shipping or servicing you. If you need what they provide and you can’t get it elsewhere, what choice do you have? Examples of creditors with this type of leverage are utility companies (telephone, gas, electric) and any exclusive supplier of materials or services you need for personal or business reasons.
 

Step 3 – They can send you to collection - Sooner or later if you don’t pay the creditor will probably refer your account to a collection agency. Bill collectors like creditors can contact you by phone, fax, mail and even by email to try to convince you to pay. And as with creditors their requests for payment may soon become demands and get progressively more threatening. But once again no matter what a bill collector says or how strong he comes on, all he can do is ask you to pay. Collection agencies have no power at this point to force you to pay.
 

Step 4 - Your debt can be reported to a credit bureau. At any point in the collection process without notifying you a creditor or its collection agency enforcer can report your delinquency to one or more of the national credit bureaus (Equifax, Experian and Trans Union Credit). Normally, they will forewarn you in an attempt to intimidate you to pay. This is their only legal weapon to collect consumer debts. And, it’s an effective one because many people will pay to avoid negative notations on their credit file.
 

Step 5 - Your debt may be referred to an attorney.  Though law suits are seldom used to attempt to collect consumer debts most uncollected debts are eventually referred to an attorney. Many attorneys operate just like collection agencies and have no intent to sue on most of the debts referred to them. It’s simply a scare tactic to try to coerce payment. The expense of filing suit and the limited success rate collecting judgments on consumer debts usually discourages creditors from going that route. A decision to sue will normally depend on the amount of money owed, how much it will cost and the creditor’s presumed chances for succeeding. As a general rule, creditors don’t file suit on debts that are less then $1,000.00.

4.   What is a secured debt and what can happen if I don’t pay it?

Secured debts arise from transactions where collateral and or special collection rights are given to sellers or to lenders to back up your promise to pay. These transactions will have written agreements and ownership of merchandise will remain with the seller until payment in full has been made. If a purchaser or a borrower fails to pay as required, the creditor can use the special rights he has to force collection without having to first file a law suit in court and obtain a judgment. Examples of these special rights are:

• Seizure of collateral – a bank taking possession of a Certificate of Deposit you gave them as collateral for a secured credit card that you stopped paying.
   

• Repossession of merchandise – taking back an automobile or some business equipment you purchased if your loan payments stop.
   

• Foreclosure - taking possession of your home if your mortgage payments stop or your business assets if your payments on a business loan stop.
   

• Eviction - removal of a debtor from a leased property if rent payments stop.

Secured debts are much more difficult to deal with than unsecured debts. Creditors have extensive collection powers and debtors are deprived of many of their rights. This seldom leaves any leverage for debtors to negotiate favorable settlements.

5.   What is a judgment debt and what can happen if I don’t pay it?

Judgment debts arise when you don’t pay and a creditor sues you in court and obtains a judgment against you to collect. In many ways a judgment converts an unsecured debt into a secured debt because it gives the creditor special rights to collect. This may include the seizure of property or the garnishment of wages. Judgments can also extend the life of a debt for as much as 20 years.

6.   What’s the story with tax debt and what can happen
if I don’t pay it?

Tax debts, whether federal or state income tax, real estate tax or sales tax, are probably the most difficult debts to deal with. The Internal Revenue Service, states governments, cities and municipalities have enormous powers to collect tax debt. In fact, the IRS and some states can seize your property and your earnings without going through due process of law (suing you and getting a judgment first). 

Tax debt is secured debt by operation of law. For example, the IRS can take your non-exempt property and garnish your wages without your consent and without having to obtain a judgment in court. They can also impose severe penalties for non-compliance and non-payment and charge you interest. With the exception of an old fashion “Loan Shark”, you know the ones that charge 10% interest per week and break your limbs if you don’t pay, the IRS and some states are the most difficult creditors to deal with.

There are ways to work with the IRS and with some states to resolve tax debt problems, prevent seizures and even make settlements. However, doing so requires specialized knowledge and experience and should be done with the help of a qualified professional.

7.   What determines whether a debt is a personal or a business obligation?

Consumer or personal debts are those incurred for family, personal or household reasons. Commercial or business debts are incurred for business reasons and can be due from individuals, companies, corporations or any entity. Thus, the factor that determines whether a debt is a consumer or a commercial obligation is the purpose for which a debt was incurred; not who incurs it.

8.   How does the difference between Personal and Business debt affect my rights and creditor collection remedies?

This distinction is important because collection practices of consumer debts are subject to strong federal and often state regulation while the collection practices of commercial debts are not. It is also important because credit reporting, which is a very effective device when used to collect consumer debts, is not nearly as effective for collecting commercial debts.
 

So, as you can see, the nature of a debt will often dictate what steps a creditor can take to collect it. And, when you don’t pay you put yourself at risk for various creditor remedies depending on what kind of debt it is. Therefore before you take any steps to deal with your debts you must understand what your exposure is and carefully weigh all the possible consequences. No matter what the situation may be, and even if you have a legitimate dispute, you may still be open to these perils.

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