Types of Debt

The Different Types of Debt

Good Debt Vs Bad Debt

There are two different categories of debt you can accumulate, Personal Debt and Investment Debt. Personal debt, often called “bad debt”, results from the purchase of an asset that will likely depreciate over time. This includes borrowing for such items as a new car, clothes, or furniture. With personal debt, it is important to note why you have it in the first place and to what degree it is necessary. Financing a car because it gets you to work or school may be an acceptable form of personal debt. Purchasing a new car on a whim is not. Each situation should be considered and analyzed in accordance to its situation.

Investment debt, often called “good debt”, results from the purchase of an asset that will likely appreciate over time. This includes borrowing for an education, the purchase of a new home, or starting a business. The tax deduction on mortgage interest makes investment debt one of the more acceptable types of debt.

Debt Payments

When it comes to making debt payments, some debts are more essential than others are. There are Essential debts to pay, that must be paid, to avoid court and legal actions, as well as maintain good credit, while Nonessential debts, while still affecting your credit if not paid, do not affect it nearly as much. Below, there is a table dividing the Essential and nonessential debts into an easy to understand chart.

Your financial situation must not be plagued with high personal debt. What determines that is your ability to understand the different types of debt and priorities of debt payments. They are important factors in determining your success. Below, there are examples for each type of debt, as well as suggested methods of taking care of these debts.

Non-priority Debts

Credit debts are classed as non-priority debts. This means the action that creditors can take against you to recover their money is usually less severe than for priority debts. For instance, you do not usually lose your home or risk imprisonment if you cannot pay back a credit debt. However, some non-priority creditors may take court action against you and, if you are a homeowner, this could result in a charge being put on your home. Types of credit debt include bank loans, credit cards, overdrafts, store cards, catalogues; other debts to banks, conditional sale agreements, interest free credit, bill of sale, debts to pawnbrokers, debts to individuals below are a few suggestions on what actions you can take if your credit debt is out of control.

Make a deal-Most creditors will accept a low repayment offer if it is all you can afford. Many times, monthly payments may even be lowered or dismissed. Ask for any interest to be frozen on your account and any administration charges to be waived. If this is the only way to pay off your debt properly, many creditors will understand and be sympathetic.

Make Some Changes-Consider changing your account if your bank is taking money from your current account to repay a debt such as a credit card. Also, make changes in the way you use your credit cards. Do not increase the debt that you have on them by continually using them.

Priority Debts

These types of debts are ones that will need to pay quickly or you may lose something or will be to your future disadvantage. Debts such as Mortgage or car payments or student loans all fall into this category. When trying to resolve these issues, most times, contact with the creditors is the best option for resolving your financing issues and reaching an acceptable medium between you and your creditor. Below are some words of advice on contacting your creditors.

Answer your phone - Don’t ignore letters or phone calls from your priority creditors. Get in touch with them as early as possible and explain to them why you are in debt. If you call them over the telephone, you should follow up the call with a letter, confirming what you said on the phone. Keep copies of any letters you write to them. An advice agency such as your local Citizens Advice Bureau can help you write to your creditors. If you have poor writing skills, or are unsure of proper terminology or correct structure, these facilities can be of paramount usefulness.

Holding Letters -- If your priority creditors are threatening to take court action or have started to take court action against you and you need a little time to sort out your finances, send them a holding letter explaining your problems. Say that you will contact them again within two or three weeks. Ask them not to take any further action during this time. For more about negotiating with your creditors, see under heading Negotiating with creditors.

Make Payment Arrangements - Once you have paid off your mandatory expenses, (Food, clothing, etc.) contact each of your priority creditors and arrange to pay back what you what you owe. If you cannot pay back all of the debt at once, arrange payment plans satisfactory to both sides.

For example, you may be able to pay an extra bit each month until the debts are cleared. Another possibility is that you may not have any extra money now, but know you will have a lump sum in four months’ that will clear the debt completely. When it comes to these payment plan types, creditors are typically very understanding, helpful, and accommodating.

When you just can’t pay

If you cannot afford to pay anything to your priority creditors and your situation is not likely to get better, the outcome may be very serious. Examples of this could be being laid off on a job, or have received an injury preventing you from working. Get advice straight away. There are several agencies that specialize in these situations, and they may be able to help before your only choice is to file for bankruptcy.