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We get into debt when we borrow money we don’t have for things we want before we can save for them and pay cash. That’s how the credit card industry occurred. Lenders started giving credit to worthy borrowers back in the cowboy days. Over the decades, it has become the largest business in the world.

Let’s look at the automobile as a prime example of getting into debt. With the cost of vehicles today, there are only a small percentage of people who can afford to pay cash for a vehicle. The rest of us ask a lender to provide financing for us. We put a minimal amount down, and we make monthly payments.
For the lender must make a profit lending us his money. So he offers a percentage interest rate that is applied to the balance due, split up into monthly payments over time. If you agree to his offer, you sign the papers and you drive away. The lender is taking a big chance that you will honor your commitment, and pay him back as agreed. That “chance” he is taking is called a “risk factor”.
You are graded on your credit report based upon your history of borrowing and paying back. This grade is a number that the bureaus apply to you. This numbered system indicates how much risk a lender is taking in allowing you to borrow from him. He will make a decision to lend you money to pay for the things you want based on this number. He may make a decision to lend money to you even though you may not have the highest credit score, and to offset his added risk, he may charge a higher interest rate.

If you run into financial trouble during the length of your loan, and you begin making late payments or skipping payments, you are considered “in default”, and the lender must act to mitigate his risk or take back the property. Some of the ways risk is mitigated include:
> Higher interest rates
> Financial penalties including late fees and over-limit fees
> Ultimately, if the loan is not caught up soon, foreclosure or repossession is an option for a lender.  Foreclosure means a legal process whereby the vehicle can be repossessed by the lender. As the borrower, you do not get to recover any of your payments, because you were paying for the use of the vehicle.

It is very important for you to understand the basic differences between a “secured” loan, such as a car loan, and an “unsecured” loan, such as a credit card.

Simply stated, a “secured” loan means that you promise to give back the property if you can’t pay, and the property has to be in good working order similar to when you received the property. You will not get any of your money back in this situation.

An unsecured debt, like a credit card, means that a lender agrees to allow you to borrow at will without any security or collateral to back up the loan. A lender will give you a credit line up to a certain amount. As long as you don’t go over the limit and pay your bills on time, the lender is happy because he is making money every month on the loan. Remember, the lender is paying out of his pocket, in advance, for you to get what you want. If you do not pay him back in full, within the length of the loan, then he may not easily get his money back. He trusts that you borrowed the money “in good faith”, and that your intentions are pure. He knows that may not be the case, so in these cases, depending upon your credit score, he may apply a higher interest rate to these types of loans. You agree when you get the credit card that if you do not pay on time every time, at least the minimum amount he requires, you will be in “DEFAULT”.

The agreement you sign gives him the right to sue you in court to recover his money, including interest, court costs, and attorney fees.  If he is successful, and he usually is, you will have a default judgment against you.

It is important that you understand what that means.  Getting a default judgment against you means that the court gives the power to your creditor to do three things to collect from you legally, and none of them are pleasant:

1)  Wage Garnishment.  The creditors attorney will ask the court for a warrant, and serve that warrant on your employer, called a “garnishment”.  A wage garnishment means that your employer is given a court order to withhold certain amounts from every paycheck you get until that debt is settled.  The amount can vary by state, but most states allow about 25% of your take-home pay to be withheld, and then sent to the creditor as partial payment of the debt.  There is no way out of this unless you quit your job.

2)  Bank Account Seizure.  The creditor’s attorney will get a court order to seize your bank accounts.  This means that a court order is given to your bank that compels them to freeze your account(s) for 30 days.  If you have automated payments and/or automated deposits scheduled, none of those things will happen during the freeze, making it difficult for you to keep up with your bills.  If the bank finds a checking account with just one person’s name on it, and all the money going into that account is from wages, your bank will be compelled to give your money to the creditor at the end of that 30 days.  However, if the account they find is a joint account, and your spouse is not named on the lawsuit, and you do not live in a community property state, then the creditor can’t take the spouses contributions, nor can they take social security, disability, SSI or pension money…those funds would be released at the end of the 30 days.

3)  Property Lien.  If you own your home or other real property, the creditor’s attorney can place a lien against it.  This means that a piece of paper is put with your title documents saying you owe this money, and you will not be allowed to sell the property or transfer the title as long as the lien remains unpaid.

This is a lot of power given to the creditor.

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