By:Michael A. Cibik
Americans are drowning in debt. In November 2019, American consumer debt climbed to $4.17 trillion. That’s trillion with a T–twelve zeros. Chances are pretty good that you’re one of those Americans, with credit cards, a mortgage, and a car payment or two. And that’s okay–in lots of ways, debt is good for our economy.
The reality is that we are living in a consumer economy, and most of us don’t have the savings to fund large purchases. So we use credit for everything from home purchases to education to new furniture and vacations. When you spend money, the dealership or hotel doesn’t care if you’re taking out a loan, using a credit card, or walking in with a briefcase full of hundred dollar bills–you’re helping their business grow.
Growth means bigger profits, and bigger profits contribute to rising stock prices, which makes a company more valuable. Higher valuations give companies more capital (money) to invest and hire more workers, which leads to job creation and rising incomes. The more money consumers have to spend, the more inclusive and better the economy. So spending is a good thing- as long as it’s done within your means.
The three examples of debt mentioned above–home, education, vacations, and stuff–represent three different kinds of consumer debt. Consumer debt is what you owe as an individual–you’re not a business and you’re not the government. If you’re a small business owner, you know that your business debts are separate from your personal credit cards and loans.
Consumer debt falls into three categories–secured, unsecured, and a nebulous third group that isn’t easily categorized, but in general, involves a court or government debt. Which category your debt falls into matters because if you are considering bankruptcy, that third category can’t be included in a debt discharge.
The most common debt in the US is secured debt–where you have pledged an asset to the lender to reduce their risk against loss. Mortgages and car loans are examples of secured debt. The lender retains actual ownership of the house and car until you make the final payment, and if you can’t make the payments they seize the asset via foreclosure or repossession.
Your secured debts have a start date and a final payment date, and typically every payment due is the same amount (if you have an adjustable mortgage the amount will change after the predetermined period) on the same day of the month, which is most often the first or fifteenth. If you’re having a tough time managing your debt, secured debt should be your priority since it’s your house and car.
Credit cards and personal loans are examples of unsecured debt–there is no security pledged against default. Card companies consider your overall credit health when they issue a credit card, basing your credit limit on your credit score. Your bank may have given you a personal loan based on the same factors.
Credit cards, including individual store cards like Target and Best Buy, are revolving debt–you have a limit on the card, and as long as you pay the debt off or down every month you can keep using the same credit over and over again. Your minimum payment every month depends on your outstanding balance, and that payment is not enough to keep interest from piling up. Lots of people get in financial trouble when they stick to that minimum payment on several cards until their balances creep up over their limits–you should always make more than the minimum payment.
Personal unsecured debts are amortized like car loans–you have the same payment due over a period of months or years. You can’t “re-use” credit as the balance declines, but you can be assured exactly when that debt is paid off.
As noted earlier, there are some debts that stay with your forever, or at least until you pay them in full or negotiate some sort of settlement. And these are debts that involve money you owe to or through the government. Here are some examples.
Bankruptcy will not wipe those debts out, but it can help you pay them in easy monthly installments.
If you do file for either a Chapter 13 or Chapter 7 bankruptcy, you are still on the hook for these debts. In Chapter 13 you’ll continue to pay then within the plan (through the trustee) and in Chapter 7 you’ll keep paying after the bankruptcy is over.
Student loans have turned out to be crushing debts for many Pennsylvanians, and not just recent graduates. The seismic shift in job opportunities sent many adults back to school after 2008, and they took out loans to finance their re-education. Student loans may be eligible for a bankruptcy discharge if you meet the standards of the Brunner test or the Totality of Circumstance test. For both of these, you need to show undue hardship for your family if you continue to make the payments, and that you have made some good faith effort to repay.
Student loans that were incurred through for-profit, vocational, or trade schools may be eligible for discharge if you can prove they acted in bad faith. Bad faith would be a breach of contract, fraud, or unfair or deceptive business practice.
If you’re using new credit cards to pay off old debt, it’s time to consult one of the attorneys at Cibik & Cataldo. Take a proactive approach to managing your finances before things get out of control and you’re at greater risk of losing your house or car.
We are a debt relief agency that helps people
seek bankruptcy protection under federal law