The old saying that there are two sure things in life, death and taxes, may need to be updated for the 21st century, with a third certainty for most people's lives: debt. Whether it's to buy a house, a car, or finance personal purchases or vacations, debt finds a way into most Americans' lives.
Two Types Of Debt
Generally, there are two main types of debt, secured and unsecured. Knowing what separates the two can make a significant difference in understanding how your financial obligations will affect your rights and options in dealing with debt challenges. Both types of debt are commonly found in typical consumer debt arrangements, depending on the financing and the loan terms.
Secured debts are obligations for which the borrower has pledged something valuable, called collateral, to secure the loan. If there is a default, the creditor can take possession of the collateral property and use its value to pay back the money due on the loan. Typical examples of secured debt are home mortgages and car loans.
In those cases, the thing being purchased with financing is the collateral for the loan. If you default on a car loan, the lender can come and take your car without going to court to get authorization to proceed, and if you default on your home loan, the lender can start the process of foreclosure that will let them sell your house to pay off the loan.
Another type of secured debt is attached to a lien, a legal claim against your property. There are a few ways that a creditor can get a lien, including:
- they did some work on your property to have a mechanic's lien
- they won a court judgment against you that they secured with a lien
- you owe a tax debt
Whichever way the secured debt started, if the debtor that owes the money can't pay it back as agreed, the secured creditor can repossess or foreclose on the secured property and have it sold to satisfy the debt. Because secured debts allow the lender to take the parcel to meet part or all of the loan, the cost of these types of obligations is usually lower in the form of lower interest rates or fees to borrow the money.
Unsecured debt is an obligation that isn't attached to any collateral and where the creditor has no lien. Typical unsecured debts include credit card charges and some other consumer debt that doesn't have an agreement that attaches the debt to some property that you own. Some other examples of non-traditional types of unsecured debt include money that a creditor claims to be due because of:
- Attorney fee disputes – a law office claims that you owe money for services rendered
- Subrogation claims – a new creditor makes a legal claim against you after they've paid the debt that you owe to another creditor; if they went through the proper legal processes, you then owe the debt to the new party
- Auto loan deficiencies – when money remains due on a car loan even after the car has been voluntarily returned or repossessed and sold to pay off part of the loan, the lender can usually come after you for the difference between what the car sold for and the amount due on the loan
- Commercial debts—including unpaid business space leases or services delivered to your business that the provider claims money due
These unsecured debts come about in different ways and are treated somewhat differently in the law if the creditor tries to collect the debt. The common theme between them is that there is no collateral –that is, valuable property to secure the loan –that the creditor can take possession of to try to pay off the loan if you stop paying it.
What Are Your Liabilities?
Not all debt can be collected. If the debt is unsecured, the creditor may have few options to collect the money when you cannot pay the total amount. A creditor may continue trying to collect the money for the debt, but if there is little money available and no collateral to seize to get money from, they may turn to other options. California law limits the methods and means collectors can use to get money from you. An experienced debt resolution lawyer can help you understand your rights.
In some cases, creditors may continue to try to collect by taking you to court to get the judge to issue a money judgment against you for the amount that remains unpaid. But a debtor with few other assets or insufficient income to satisfy the debt is sometimes referred to as judgment proof. A court judgment for the amount due might do the creditor little good if no valuable assets and little income are available to pursue, even with the power of the court behind them.
What Is The Statute Of Limitations?
The statute of limitations in California for most consumer debt is four years. Written contracts like loan agreements come under this four-year time limitation. Under the statute of limitations, a creditor can't take you to court to collect the debt beyond four years from the date the debt started. In that case, the debt is essentially uncollectable. Without court authority behind them, all the creditors can do is ask (as well as make damaging reports to credit reporting agencies that cause your creditworthiness to decrease).
There are, however, some ways that creditors can get the debt countdown to start over after four years.
When an old debt is reactivated by you making a payment on the debt, the creditor has another four years to sue for payment. It's vital that you seek legal counsel if you are facing persistent creditors trying to restart a debt that has been in default for some time.
How Do Creditors Go About Collecting Unsecured Debt?
An unsecured creditor, such as a credit card company or a lawyer trying to collect legal fees, has few options if you can't or won't respond to their calls and letters with money to pay what they are demanding. With no collateral to grab and sell, they may get more desperate and try to take you to court to collect the money. Often, your account will change hands, as the original lender may choose to send the account out to a collection specialist. They may transfer or sell the account to another company, taking over the effort to collect.
To be able to grab onto your property, like money in your bank account or from your paycheck, an unsecured creditor will first have to get a court judgment against you for the amount of the debt. If a creditor sues you and you don't respond appropriately in time, they can get a default judgment, which means the court rules in their favor because you didn't answer and get involved in the case.
Garnishments & Levies
Once a creditor has a court judgment against you for the amount of the debt that hasn't been paid, they have more options to go after your property more aggressively. With a court judgment, creditors can come after your paycheck with a process called garnishment or even take money out of your bank account, which is called a levy.
There are legal limits on the amount of money they can take and how they do it, but at that point, the creditor has much more power over your finances than when they just had an unsecured debt. This is why it's critical to get reliable legal counsel if you face a lawsuit over unsecured debt. Suppose you receive a notice of a lawsuit against you. In that case, especially if it comes with a court document called a Summons, which is your official notice that you must respond to the lawsuit, you need to reach out to a qualified debt resolution attorney. A failure to respond in the time allowed, usually just 20 days or less, can result in a default judgment against you.
What Are Some Defenses?
There are valid legal defenses and objections you and your lawyer can make if an unsecured creditor is trying to get a judgment against you in court. These include:
- Flaws in the legal procedures and paperwork to collect the debt
- Failure of the creditor to provide the original written agreement that started the debt
- Mistakes of fact about the amount of debt or who owes it
- Expired statute of limitations
Get Legal Help
The lawyers at Fitzgerald & Campbell, APLC have helped Californians resolve debt problems since 1992. Our efforts have saved our clients millions of dollars of debt. Our team of compassionate problem-solvers knows that debt problems can feel overwhelming and stressful. Our focus is exclusively on consumer and small business debt issues. We are eager to apply our extensive legal knowledge and skills to represent you as you work to get your finances stable. Reach out to speak to an attorney today to see how we may be able to help you eliminate your unsecured debts. Call us at (844) 431-3851 or contact us online.