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You learn a lot in high school that you will most likely never use. Trigonometry is only useful if you're an engineer. Diagramming a sentence is the duty of an English teacher. The Periodic Table is for scientists! While there's obviously "room" for these skills in other professions, you get the idea. With all the time that these kinds of subjects take up, there's limited time left for your teachers to teach you things that everyone needs to know. One of the subjects often woefully neglected in school is financial literacy.
With all the time that these kinds of subjects take up, there's limited time left for your teachers to teach you things that everyone needs to know. One of the subjects often woefully neglected in school is financial literacy.
Financial literacy means understanding the basics of saving, spending, taxing and (last but not least) debt. Pretty much everyone except for the extremely wealthy and the extremely frugal will need to borrow money at some point in their lives, so understanding the risks and rewards of debt is vital for achieving long-term financial success. Unless you seek out that information yourself, though, chances are that you don't know as much as you should about debt management.
That's understandable. You're reading this article, so we'll assume that you're ready and willing to educate yourself.
While debt is a deep and wide-ranging topic, we'll start simple. Here are five of the most common questions that many people are too afraid to ask.
1. Does debt expire? If you haven't paid the debt in a long time, will it go away?
If you fail to pay your debts and fall behind, you can be certain of hounding by collection agencies trying to get you to pay. These calls and letters can be miserable torture, and it will probably seem like they're going to go on forever if you don't do something.
We have good news, though: they can't. Debt "expires," just like anything else.
You've probably heard the term "statute of limitations" before. The statute of limitations is a legal time limit that states how long a debt collector or creditor can continue to pursue repayment for outstanding debts. If your debt has passed the statute of limitations, then it is no longer legally enforceable.
Each state has different laws concerning the statute of limitations on debt, but you'll be pleased to know that, in the grand scheme of things, it's not that long. In some states, the statute of limitations can be as short as three years, while in others it can be up to six. With debt collectors harassing you, that's going to seem like an eternity, but it really isn't that long in the end.
The clock starts ticking on the statute of limitations on the last day of activity on your account. This day is not necessarily the date of your last payment. It should be on your credit report. If you're trying to figure out when the statute of limitations on your debt runs out, find this date and start counting based on your state's laws.
The statute of limitations on your debt can be your best friend if your debt collectors are still calling. Many collectors will continue to harass you even after the deadline passes, relying on the fact that most people aren't aware that such a statute exists. They might even introduce lawsuits trying to bully you into paying up. In these cases, you can refer to the statute of limitations in your state as proof that they should back off.
We definitely don't recommend that you stop paying your debt in an attempt to wait it out, but if you plan to try to lean on the statute of limitations, there are a few warnings you should heed.
First, know that any account activity will restart the statute's clock from zero. If you make the promise of a payment or make a charge on the account, you'll be back to square one.
Second, know that the statute doesn't make the debt disappear. It just prevents collectors from winning a judgment against you in court, keeping them from pursuing the debt further.
Third and finally, know that the statute of limitations is not the same thing as the credit-reporting time limit, which is usually longer. Even after the statute of limitations runs out, the unpaid debt will likely continue to wreak havoc on your credit score.
Read more about expiring debt here!
2. When you die, what happens to your debt? Does it disappear or does someone else have to pay it?
There's an old cliché: "You can't take it with you," with "it" being your money. That phrase could just as easily apply to debt: when you die, your debt doesn't die with you.
Your debt falls on your estate when you pass away. One of the major reasons people take out large life insurance policies, in fact, is to ensure that their estate will be able to discharge their debts when they die. The executor of your estate handles the repayment process, cashing in your insurance, selling off assets, and sending out checks to your creditors until your debt is no more.
Generally, if your estate runs out of money before paying your debts, your creditors just have to eat the debt. Some forms of debt, though, can transfer to other people even after you die.
Mortgages and home equity loans, for instance, can pass on to whoever inherits your home. Generally, lenders will work with the heir to arrange a taking over of payments, although lenders can force the heir to pay off the entire loan balance at once.
Credit cards are bit more of a gray area. Joint account holders will be responsible for any unpaid bills, and spouses in community property states will end up responsible for any debts run up while married. Otherwise, credit card companies will attempt to get payment from the estate and then drop the issue.
Student loans can be even murkier. The estate will likely repay private student loan debts, as much as possible, but federal student loans discharge in the event of death. Federal PLUS loans discharge in the event of the death of the parent or student. In addition, some private lenders such as Sallie Mae and Wells Fargo forgive student loans in the event of the death of the student.
That said; co-signers on student loans are still responsible for keeping up with the remaining loan payments even if the student passes away. In community property states, spouses also become responsible for student loan debt taken out during the marriage.
In short: your estate will pay off as much of your debt as possible. With secured debts and debts that involve other people (co-signers, joint account holders, or spouses, for instance), lenders generally have some recourse for seeking repayment past that. With unsecured debts, they're generally out of luck.
3. If you marry someone, do you automatically become responsible for his or her debt?
We like to think that love and finances exist on two entirely separate planes, but unfortunately, that's simply not the case. If you're about to marry someone who is swimming in debt, or if you're thinking about proposing but don't want to drag your spouse financially down with you, then you're probably asking yourself, "What happens to debt when I get married?"
The good news is that your debt and your spouse's debt won't automatically become a shared burden when you tie the knot. Your debts and credit histories remain separate, even if your spouse takes your name or vice versa.
That said, once you are married, any new debts that you to take on might affect both of you. Joint banking accounts, joint credit lines, co-signed loans, and shared use authorization on credit cards: all of these wonderful financial benefits of marriage will end up on both of your credit reports.
Shared debts don't follow fair repayment rules either. You don't split the burden of debt down the middle. If you can't keep up with your shared debt payments, your spouse has to pick up the entire tab.
In addition, state laws differ when it comes to which debts a spouse can be responsible for. "Community property" states decree that, even if your spouse takes on debt during a marriage as an individual, you might end up responsible for it, especially if the debt benefited you or your marriage.
4. What happens if someone does not pay a debt that you've co-signed on?
Financial disputes between family and friends can get ugly, fast, and one of the major causes of these disputes is co-signing. When you co-sign on a loan for someone, you're agreeing to take on the debt if the other person on the loan can't keep up with the payments. It doesn't matter if the loan is for something that doesn't benefit you at all, such as someone else's car or education. If you co-signed, you're on the hook to pay off the debt in full.
Because of this, if the other person falls behind and starts making late payments, those payments end up on your credit report and can damage your credit score. Debt collectors will call you seeking repayment. If those collectors decide to sue, you can be sure they'll sue you as well. If the creditor decides to pursue foreclosure, repossession, or any other major action to recoup its losses, that action will show up on your credit report, even though you didn't actually lose any of your property.
Even worse, if the other person files for bankruptcy and the debt is discharged, the creditor can still come after you to repay the debt in full, even though the other person (whom the debt actually benefited) is out of the picture.
On top of all that, you don't really have many options if the other person starts missing payments. You can either cover the payments, get the person to refinance the loan in his or her name only, or, in a worst-case scenario, file for bankruptcy.
The takeaway here: don't co-sign on someone's debt unless you really know what you're getting into. If you have anything less than total faith that the individual will be able to pay off the debt without a hitch, politely say no.
5. If you can't afford to pay your debts, what should you do?
The hope is that you'll never get into a situation where you can't afford to pay your debts, especially over a long period of time. Everyone misses payments occasionally, and generally, if you catch up within a month, the consequences will be minimal.
If you really start to fall behind, though, the consequences can be devastating. You'll damage your credit score, suffer harassment from collection agencies, and potentially even end up in court facing your creditors.
If you're on that path and there's no way to get your financial act together on your own, don't panic, as you still have options.
Debt relief comes in a variety of different forms, but all have the same basic goal: making your debt easier to deal with so you can stabilize your financial future. Debt consolidation loans, credit counseling, debt management, and debt settlement: there is likely a debt relief option out there that fits your needs.
If you need a hand figuring out what to do with your debt, and what your best debt relief option might be, the experts at National Debt Relief can help you put together a plan that makes sense for your circumstances. We've helped scores of people in similar situations get out of debt. Contact today to get started!