Defining Debt
A brief explanation of the types of debt and how it applies to you. Understanding the different types of debt will help you understand your options when dealing with a debt you cannot afford to pay.
Secured Debt Secured debts are legally attached or secured by an asset. The most common types of secured loans are mortgages or financing on vehicles. To secure a loan, lenders place a lien on the asset. This gives the lender the right to seize the secured asset through repossession or foreclosure if the terms of the contract are breached. For most people, this happens when payments are missed or a loan is in default.
The typical process after seizure of an asset is sale of the asset, the asset serves as collateral for the debt, so it will be sold through a foreclosure or in the case of a vehicle, at an auction, after the lender takes possession of it. If there is a difference between the amount recived from the sale of the asset and your balance on the loan, the lender may pursue collection of this amount. This amount is usually called a "deficiency balance". Because there is no remaining collateral, this debt now unsecured.
Unsecured Debt Unsecured debt refers typically refers a loan or line of credit not secured by collateral. Credit cards, medical bills, payday loans and deficiency balances are common forms of unsecured debt. Unsecured lines of credit and personal loans are also unsecured debts. With few exceptions (discussed in the next section) nearly all forms of retirement income are protected from judgments resulting from this debt.
Taxes is also an unsecured debt. It's important, however, to understand federal protections on retirement income apply only to state governments. This means your federally protected retirement income cannot be offset or garnished for money owed for state income taxes. Federal tax debt, however, is an exception to the laws protecting retirement income. (See the next section for more information.)
Unsecured Debt Owed to the Federal Government and Past Due Familial SupportFederal benefits like Social Security Retirement or Veterans benefits can be offset for these unsecured debts. Debts owed to the federal government that typically trigger an offset are debts like income taxes, federally subsidized student loans and USDA loans. Funds from federal benefits may also be withheld for familial support debts child support and alimony. Your benefits may also be garnished for court ordered victims restitution.
If you owe federal debt and your federal benefits are being offset for tax debt or student loans, you can seek relief by applying for Currently Not Collectible status with the IRS or Income-Driven Repayment with the Department of Education.