Bad (and Good) Debt in Bankruptcy. Too Much Bad Debt?
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Bad (and Good) Debt in Bankruptcy

When considering types of debt that one can have, there are typically two types: good debt and bad debt. A debt is considered to be "good" if it is an investment. Most others are considered "bad".

Examples of good debt include home mortgages and student loans.

Typically, homes appreciate in value over time. A home mortgage is considered an investment that can yield a profit for the homeowner, either in equity or in resale value.

Similarly, higher education loans usually allow the graduate to earn an income that will be able to pay off the loan over time, and continue to make money over a lifetime.

Bad debt applies to anything paid for with credit that does not increase in value, such as most credit card debt, and even car loans.

Because credit cards typically have a high interest rate, any debt that is not immediately paid off in full is bad debt. Even when purchasing something of relative scarcity, such as jewelry, may be considered bad debt.

Likewise, new cars are almost never worth as much after you buy them. While a loan for a car used for commuting to work may be considered a good investment, the loan is typically considered "bad debt".

Bad Debts and Collections

In the financial world, a bad debt is any debt that is no longer expected to be collected. Bad debts apply to debtors who are reluctant to pay their debts.

If you owe a debt that is considered bad, it will typically be handed over to a collections agency, who are professionals at collecting on bad debts.

Creditors who originate debts that have gone bad typically sell those debts to collection agencies, who specialize in getting debtors to pay. Collections agencies also may raise the interest rate or the total amount due in order to profit off of debtors.

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Collections agencies may not offer the customer service niceties that many originating creditors use, as they know that the debtor is reluctant to repay the debt. Dealing with creditors is hard, but dealing with collection agencies may be even more difficult.

If you are facing collections on a bad debt and unable to pay, one option is filing bankruptcy.

By filing for bankruptcy, you may enact the automatic stay, a court order that prevents collections efforts. All creditors must adhere to the automatic stay, even if they have purchased a bad debt.

The automatic stay allows debtors some breathing room from creditors, and may provide protection during the entire bankruptcy procedure.

Discuss your options to deal with bad debt with a local bankruptcy attorney today.

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