When financial problems arise, consumers need to understand the consequences of the different types of debts and how they can be affected if not paid. Below is a brief description of what can happen if either "secured" or "unsecured" debts are not paid.

SECURED DEBTS - Secured debts are backed by collateral. Collateral is property that can be seized in the event the debt goes unpaid. Examples:

• Secured credit cards - If you don't pay on your secured credit card the card issuer who has control of your collateral (savings deposit) can seize your savings deposit and suspend your privileges to charge on that card in the future.
• Home mortgage - If you should fall behind on your mortgage payments, the mortgage lender can seize your home (foreclosure), leaving you with nothing. All current and future equity accumulated in the property would now belong to the mortgage lender.
• Automobile loan - If you should fall behind on your car payments, the bank or financial institution has the right to legally repossess your car without your permission. If the car is repossessed, the car is now the property of the bank or financial institution that holds it's title.

UNSECURED DEBTS - When dealing with unsecured debts, like credit cards, department store cards and medical bills, here are three basic things that can happen if your debt goes unpaid. Examples:

• Cancellation of your credit charging privileges. This means that you will not be able to use your credit card or credit for purchasing items or services. All charging privileges are terminated.
• Damage to your credit rating. Most collection agencies will tell you that your credit will be ruined unless you make a payment to them. If you are behind on your payments, the creditor you owe money to has already reported your late payments (30, 60 or 90 days) to the credit bureaus. Therefore, your credit has already been damaged from non-payment.
• Being sued for the unpaid debt. Most creditors and collection agencies use this tactic to scare the consumer into paying the unpaid debt. Litigation is very expensive and most creditors and collections agencies cannot afford this expense. Other threats you may hear from creditors or collection agencies are; "we are going to garnish your wages and seize your home or car and sell it at auction in order to pay the unpaid debt off!" In order for a creditor or collection agency to garnish your wages, seize your home or car, they first must file suit in court, obtain a judgment and a court order. This process could take months and threats like these are illegal without a signed court order.

Following are the three types of agencies or firms that are authorized to call you and collect on your unpaid debts:

1. Credit Grantors - Credit grantors are companies that grant you credit (like a credit card company). Most credit grantors have a collection department within their company that handles all collections on delinquent debts.
2. Collection Agencies - These agencies are hired by the creditor to collect on the unpaid debt from the consumer. In other cases, the creditor will sell your unpaid debt at a discounted rate to a collection agency. In either case, the collection agency has the right and power to collect on the unpaid debt.
3. Attorneys - If your unpaid debt has gone to an attorney, your financial problems have only just begun. Collection agencies will usually try to collect on your unpaid debt for 60 days using every legal tactic possible. If unsuccessful in collecting, and the unpaid debt is substantial (like $7,500 plus), the unpaid debt could go to an outside law firm (attorney) for final collection and/or legal action against you in a court of law.

In 1977 the government passed the Fair Debt Collection Practices Act (FDCPA) as a law that protects consumers and debtors from harassment or unfair treatment by debt collectors. All debt collectors must abide by the rules of the Fair Debt Collection Practices Act (FDCPA) when collecting on an unpaid debt. Many debt collectors don't follow the rules and use underhanded scare tactics, which violate the rights of a consumer. Here is what a debt collector "may not do" and "must do."

Debt Collectors May Not:

• Give false or misleading information on your debt to you or others.
• Notify you by telephone after 9:00pm or before 8:00am within your time zone.
• Disturb your work duties at your employment.
• Make excessive calls to your home or work. This is considered harassment.
• Send you a letter that looks like an official government document.
• Threaten you or a family member with physical harm.
• Threaten or imply to damage your property.
• Deposit a post-dated check before the date on the check.
• Tell you that they are from a law firm, or a government agency, when in fact, they are not.
• Continue to harass you over the telephone after you have sent them written notice to cease all calls.
• Ask you for personal information. You have the right not to respond to their questioning.

Debt Collectors Must:

• Call between the hours of 8:00am to 9:00pm and they can be forceful in a normal tone when asking for payment. They cannot harass, threaten you with physical harm, or annoy you in anyway.
• Identify themselves, their company and explain the nature of the call to you. You have the right to know who is calling you and why.
• Let you know that legal actions may be used against you in order to collect on the debt. In addition, the debt collector can explain the consequences if a lawsuit is filed and a judgment is entered on behalf of the creditor.
• Ask you in advance to cancel the existing agreement and negotiate a new one. You have the right not to comply or negotiate a new agreement.
• File a creditor's claim against the estate if the debtor is deceased.
• Obtain verbal permission from you or someone else in your household in order to telephone you at work.

You should never ignore an unpaid debt from a creditor you owe money to. If you are having financial problems in meeting your payment obligation to a "secured" or "unsecured" creditor it is a good idea to notify that creditor and work out an affordable payment plan that fits into your budget.

• Solution for Secured Debts - Keep in mind that creditors with secured debts are in the business of collecting money. They do not want to repossess property unless it is absolutely necessary. Oftentimes, a secured creditor (mortgage or auto lender) can place your past-due payments at the end of your loan therefore, bringing your account current.
• Solution for Unsecured Debts - Settling unsecured debts before it becomes a problem, such as wage garnishment or litigation is always your best solution. In many cases, if your delinquent account goes unpaid for more than 90 days, the creditor will usually send you a settlement offer, by mail, lowering your unpaid balance by as much as 50%. This type of settlement usually requires you to pay the lowered settlement amount in full. If you are unable to pay the full amount, ask to set up an installment payment plan that fits into your budget.

Individuals in significant financial difficulty should consider bankruptcy protection, but be aware that filing for bankruptcy protection will have significant ramifications on your credit rating (bankruptcy information generally will remain on your credit report for 10 years; other negative credit information usually may only remain for seven years).

Before filing for bankruptcy protection, consider seeking the assistance of a reputable non-profit credit counseling agency or other professional. If you decide to go forward with bankruptcy protection after such consultation, there are two different types of personal bankruptcy for individuals:

• Chapter 7 - This chapter is the full liquidation more commonly known as "straight" Bankruptcy. This is the most common form of bankruptcy that an individual will file. Chapter 7 is only for individuals, not businesses or partnerships. In most cases, all your property is normally exempted and therefore kept out of your Chapter 7 bankruptcy. Most individuals file Chapter 7 to completely eliminate large credit card debt, personal loans and other unsecured debts.
• Chapter 13 - This chapter is best for people who have too much disposable income and also have the kind of consumer debt (like student loans, taxes, etc.) that cannot be included in a Chapter 7 bankruptcy. People that are behind in their mortgage payments and want to avoid foreclosure on their property may also file a Chapter 13. Chapter 13 allows a person to set up a 3 to 5 year repayment plan in order to make up past-due payments, therefore reinstating the creditors original agreement.

In most cases, a credit counseling agency can work with the collection agency to structure a payment schedule for repaying the unpaid unsecured debt. Once an unpaid unsecured debt has been consolidated into a consumer credit counseling program the consumer can expect these benefits:

• Creating a livable household budget and spending plan which can help you and your family meet everyday living expenses as well as monthly bills.
• Referring any creditor phone calls and letters to the credit counseling agency for customer service on your behalf.
• Most creditors, after 3 consecutive payments into the program will stop all collection activities which includes harassing phone calls and payment demand letters. In addition, past-due accounts could be re-aged to a current status, therefore improving one's credit.
• Provide budget counseling and money management education through certified credit counselors.