Definitive Guide to a Debt Free Life – Chapter 1: What is Debt?

Welcome to our first chapter in The Definitive Guide to a Debt Free Life. In this chapter we lay out the groundwork about the basics of debt.

If you are struggling with debt, you probably have a basic understanding of your problem. But how much do you really know?

In this chapter we aim to break down debt piece by piece, discussing the most common types in detail. You will come away from this chapter with the knowledge you need to attack your debt problem head on with the best relief strategies to get out of debt once and for all.

Knowing these basic details about your debt will help you set a solid foundation for your road to a debt free life. When you are done with this chapter, you will know what type of debt you are in, the best way to deal with this type of debt, and which debt relief strategy to focus on in the future.

What is Debt?

what is debt

Chapter 1: What is Debt?

There are two types of debt in the world: personal debt and business debt. If you are reading The Definitive Guide to a Debt Free Life, then the first of the two, personal debt, is the type that you need help with.

With that said, we will focus on personal debt throughout the length of this guidebook.

Personal debt is debt which you as an individual owe. You are personally and legally responsible for this debt. You owe the money to someone else, otherwise known as a lender, in the form of a loan, debt, bill, or mortgage. You are legally bound to pay it back in full according to the terms of your agreement.

Secured Debt & Unsecured Debt

Personal debt is further divided into two primary categories. These are secured debt and unsecured debt.

Your debt is secured debt if you put down some type of collateral when taking out your initial loan. In the eyes of your lender, this reduces the risk if you default on repayment. A mortgage is a good example of a secured debt. If you fail to make your mortgage repayments, your bank is legally allowed to take control of your home, sell it, and use the proceeds to cover the remains of your debt.

Your debt is unsecured debt if you did not put down any type of collateral up front. Repayment of this type of debt relies solely on your promise to pay it back. Naturally this means that unsecured loans are riskier for lenders to give out and thus come with more rigid terms, generally in the form of higher interest rates and higher monthly payments. Good examples of unsecured debt are credit card bills, utilities bills, and medical bills.

Secured Debt Relief Options

It is important that you deal with secured debts quickly and efficiently. If you fail to do this, you could end up losing your home, having your automobile repossessed, or having another large possession taken away from you.

Each of these debt relief options will work well if your debt is secured.

  • Contact Your Lender – The easiest thing to do if you are struggling with your payments on a secured debt is to contact your lender. You need to discuss your problems with them, making an effort to understand the foreclosure process. Be sure to ask what you can do to avoid it.
  • Act Immediately – All too often one or two missed loan repayments quickly spiral into three or four when they could have been taken under control if you acted upon them immediately. As soon as you let a payment slip, contact your other creditors to see if you can negotiate reduced payments. Use the money saved from these reduced payments to put towards your secured debt payments.
  • Refinance – In some cases, especially with mortgage loans, you are able to refinance your secured debts. A refinance loan is basically a loan you take out to pay your original loan. Though they can sometimes be found with lower interest rates, more often than not you have to pay a large fee upfront and extend the length of your original loan.

Unsecured Debt Relief Options 

On the other end of things are unsecured debts. If you are struggling with this type of debt, then you have a greater selection of relief options to consider.

The option you pursue depends greatly on the specifics of your debt problem. Credit counseling should always be your starting point. Even if you normally prefer to do things yourself, you should seek credit counseling help if you are buried in heavy debt. Do not take any more chances with your finances.

You will be paired up with a credit counselor when you sign up for credit counseling. This counselor will help you sort through the myriad debt relief options that you will face. Sometimes they can solve your problem themselves, especially if they stem from poor priorities or a lack of a solid budget plan.

Other debt relief options for paying off unsecured loans include:

  • Debt Consolidation – If your problems stem from high interest rates, then debt consolidation might be for you. It allows you to consolidate (in other words, combine) all of your unsecured loans into one, oftentimes with a reduced interest rate.
  • Debt Settlement – Another common debt relief option for unsecured loans is debt settlement. Though it can be an effective means to get out of debt, the process is often difficult and tiresome. In debt settlement you negotiate with your creditors and settle on a lowered, agreed upon balance that from then on out will be considered payment in full.
  • Debt Management – Debt management is much the same as debt settlement in that you negotiate with your creditors. Instead of settling on a lowered full payment amount, you create a debt management plan with different payment terms (including monthly amount, interest rate, and total length) to help you gain control of your finances.

All three of these debt relief options, along with credit counseling, are discussed in greater detail in Chapter 8: Types of Debt Relief later in this guidebook.

Good job! Simply understanding what debt is and what type of debt you are in goes a long way in achieving the debt free life that you deserve.

You are now ready to move on to Chapter 2: Common Reasons People Fall into Debt.

Here you will learn the most common mistakes people make that send them plummeting into the grim depths of debt.

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