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Common Debt Consolidation Terms

We’ve previously provided concise definitions for various terms related to debt resolution.  We also discussed the basic purpose and mechanics of debt consolidation in the earlier post. In this post we’ll continue in the same vein and discuss several important debt consolidation terms. We’ll develop a glossary of debt consolidation terms.  That way, our readers can increase their financial literacy and more easily understand our related content. As we know, debt consolidation can be a very financially beneficial means to take care of multiple, high-interest debts. Consolidation can also confer other benefits, such as the reduced stress that comes from having a single payment schedule. For the right person, debt consolidation may be the optimal route to achieve maximum financial health.

Below we identify four debt consolidation terms which will help our readers gain a good understanding of why consolidating debt is a good idea. We’ll first go through each term in detail and then summarize their advantages.  That way, readers can make informed decisions about whether to pursue any given option. 

Unsecured Debt 

“Unsecure” debt is debt with no collateral.  Collateral, in turn, is any property which can be taken by a creditor.  That usually happens when a debtor is unable to pay back a financial obligation.  Collateral is literally “set aside” property.  In essence, it’s something which a creditor has a legal right to seize in the event of default. Common types of unsecured debts include credit card debt, medical debt and personal loan debt. When someone obtains a debt consolidation loan, it’s a personal loan and therefore is an unsecured loan. Note, though, that this may not always be the case.  That’s because the nature of an unsecured debt consolidation loan depends on a variety of factors, including the size of the debts and the borrower’s creditworthiness.  

Secured Debt 

Secured debt is the second debt consolidation term we examine. It is “secure” because it has collateral. Any type of collateralized debt obligation can be classified as a secured debt. Common types of secured debts include car loans and mortgages. In a secured debt scenario, the borrower receives the asset up front.  Nonetheless, they don’t hold full title to the asset until the entire balance has been paid in full. Failure to comply with the payment obligations established by the loan agreement will lead to repossession of the collateral. A debt consolidation loan can be used to pay off secured debts as well as unsecured debts.  

Debt Consolidation Loans 

A debt consolidation loan is a loan used to simplify a debtor’s payment schedule.  It often has a more favorable interest rate than a debtor’s existing loans.  The existing debts are often paid with a debt consolidation loan. A debt consolidation loan is a type of specialized personal loan designed to achieve a specific goal. When a person has debts from multiple sources, they are often bogged down by multiple payment dates.  They may also face relatively high interest rates from one or more debts, e.g., from credit cards.

When a person obtains the consolidation loan, they can immediately pay off their existing debts.  This allows them to then focus their efforts on paying off the single consolidation loan. Debt consolidation loans are either secured or unsecured. Many companies specialize in providing consolidation loans to debtors who are looking for a new route to financial health. 

Debt Relief 

“Debt relief,” or debt forgiveness, refers to any scenario in which a liability is either partially or fully forgiven. It is a form of income.  That’s because the funds triggering the debt obligation no longer have to be paid back.  In that instance, the person relieved of the debt receives taxable gain.

Consider the following scenario. A person get a $100,000 loan from a bank . The loan carries a 10% interest rate.  It’s has an amortization period of 10 years, and a repayment total of $110,000. Now assume that the lender closes and dissolves during the term of the loan.  In that circumstance, the debtor is “relieved” of his or her obligation to repay the outstanding balance. In this scenario, our hypothetical debtor is in receipt of income.  As such, the debtor would incur a tax liability on the amount of debt relief.

In contrast to the foregoing scenario, debt consolidation is not a form of debt relief.  Rather, it’s considered to be a long-term debt resolution strategy. This is true even though debt consolidation loans can result in substantial savings over the course of an extended period of time.  

The Benefit of Understanding Debt Consolidation Terms

Firmly understanding debt consolidation terms can contribute greatly toward developing a solid strategy to address adverse financial circumstances. Unlike debt relief, which triggers taxable income, debt consolidation doesn’t result in taxable gain.  Instead, it’s a long-term debt resolution strategy which confers specific benefits on debtors. Debt consolidation allows debtors to pay off multiple existing loans and, in the process, make payments to a single creditor. This results in reduced stress and may also come with a single, lower, interest rate. Debt consolidation loans can be either secured or unsecured.  They service either secured or unsecured debts. Typically, though, debt consolidation loans are unsecured personal loans.

New York Tax Attorneys for Tax Relief and Debt Consolidation

The firm of Mackay, Caswell & Callahan, P.C., works to resolve tax debt with both IRS and New York State taxpayers. The debt consolidation terms set forth in this post can help determine whether debt consolidation is right for you.  It can also help determine whether tax relief, in particular, might be a wise path to pursue. If you have any type of tax issue or business law matter, don’t hesitate to contact one of our top New York City tax attorneys.

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