Glossary of Debt-Related Terms

Answer: This is a formal response to a Complaint that allows you to state your defense if you are brought to court by a creditor. If you receive notice that a Complaint has been filed against you and you do not file an Answer within a certain time period, the creditor could be awarded a default judgment against you.

Arbitration: Sometimes referred to as Alternative Dispute Resolution (ADR), arbitration is a forum used to settle disagreements outside of court. Most credit card companies include a mandatory arbitration clause in their contracts.

Bankruptcy: Bankruptcy is the legally declared inability of an individual or organization to pay its creditors. Although bankruptcy can be appropriate for some individuals, filing for bankruptcy should be considered a last resort as the consequences can last for 7 to 10 years.

Collateral: Collateral is any property used to secure a loan. Vehicles and homes are the most common forms of collateral. If you default on a secured loan, the creditor could seize the property you used as collateral to pay off the debt.

Complaint: This is a legal document you could receive if your creditor decides to take you to court over your debt. A Complaint is usually received with a court summons, and contains information about your creditor, the amount of money you owe and the reason you are being sued.

Credit Counseling: This is a bankruptcy alternative that could help you lower your interest rates, reduce your fees and pay off your debt, but credit counseling organizations typically cannot negotiate a reduction in the actual balance you owe. Reputable credit counselors work with consumers to educate them about how to manage their debt.

Debt Consolidation: This is a process through which multiple debts are combined into one account, usually with a lower interest rate. Debt consolidation can include transferring high-interest credit card balances to a lower-rate card or taking out a secured loan to pay off the creditors.

Debt Settlement: Debt Settlement is a legal process used to negotiate the settlement of an existing legal debt with the creditor. Any person owing unsecured debt has the legal right to contact and negotiate with their creditors, but this practice takes time to master and requires extensive knowledge of the credit industry and sharp negotiating skills. In a settlement, creditors may agree to accept a percentage of the balance due if the full payment is made within a specified time.

Default Judgment: If you are sued by a creditor and fail to file an Answer to the Complaint, the courts will award a Default Judgment to the creditor. This allows the creditor to proceed with wage garnishment, place a lien on your vehicle or property, levy your bank accounts, or take any other action permitted by the laws in your state to collect on the debt.

Exemptions: This term refers to the amount of wages, property or savings that can be protected from creditors that have won a judgment against you. Exemption laws vary by state, and you usually have to file specific documents to exercise your exemption rights.

Lien: This is a legal attachment to your property that forces you to pay the creditor if you sell or refinance the property.

Levy: This is similar to wage garnishment, but it applies specifically to any bank accounts you have.

Secured Debt: Secured debt is any type of debt that is backed by collateral. The most common examples of secured debt are car loans and mortgages.

Unsecured Debt: Any type of debt that is not backed by collateral is considered unsecured debt. Examples include credit cards, personal loans and medical bills.

Wage Garnishment: This is an option that creditors who have won a judgment against you can use to collect on a debt. Depending on the laws of your state, a creditor could seize up to 25% of your income. It is sometimes possible to have a garnishment reduced or lifted if you are experiencing exceptional financial hardship.