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What are the Types of Debt?
Understanding the types of debt can greatly assist you in determining the optimal approach for debt collection. Comprehending the nature and circumstances of debts helps in identifying the most effective strategies for their recovery, thereby contributing to increased process efficiency and reducing the likelihood of problems arising from collection. Here are the four most common types of debt:
1. Bad Debts
These are debts where circumstances indicate the impossibility of collection, due to the inability or unwillingness to pay. These debts are usually due to the debtor’s death with no estate to cover the amount to be collected, the debtor declaring bankruptcy, or the debtor fleeing the country with no known whereabouts. This type of debt has many negative impacts on both the debtor and the creditor. Creditors lose the ability to recover their debts, while the debtor suffers from a deteriorated financial reputation and may face legal repercussions.
2. Doubtful Debts
These debts are also called “unsecured debts,” where there is a possibility that the debtor will not be able to repay them in the future due to various factors that make the process difficult or unlikely. The most common reasons for this type of debt include the debtor’s financial distress and lack of sufficient assets to cover the debt value, or the absence of adequate guarantees for debt collection, such as documents or evidence ensuring the creditor’s right to the debt. These debts can pose a challenge for creditors and may require special methods and complex legal procedures for collection. Therefore, it is preferable to entrust this type to external collection agencies such as a debt collection office or to use alternative solutions such as settlement or deferral.
3. Revolving Debts
Debts that are paid off and then re-borrowed again from the same person or institution are known as revolving debts. These debts are characterized by a credit limit set according to the borrower’s ability to pay. They are usually intended to meet ongoing financial needs, repay previous debts, or support the expansion of new projects. The collection of these debts is usually accompanied by interest and periodic installments that exceed the original borrowed amount, increasing the pressure on the borrower to repay them on time and efficiently.
4. Good Debts
These are debts that are expected to be collected from debtors, whether individuals, companies, or institutions, on the previously agreed-upon due dates regularly. Unlike bad debts, which are a burden on the debtor, the collection of good debts can generate a positive return in the long term. There are many examples of good debts; here are four of them:
* Student Loans: This type of loan is used for many education-related purposes, such as financing education, obtaining excellent job opportunities, and improving an individual’s future income.
* Mortgages: You can apply for this if you want to secure your future and buy a new house or property, as their prices significantly increase over time.
* Commercial Loans: This type of loan is used to grow the size of companies. You can apply for it if you want to expand your company and improve its infrastructure, which increases your market presence and consequently increases the company’s revenues and profitability.
* Innovative Project Financing: If you have high aspirations and want to build your own company, you can apply for this funding. This type of loan is designed to help build new companies and complete distinctive technological innovations, contributing to the stimulation of innovation and the creation of new job opportunities.
Your understanding of the different types of debt is a fundamental part of sound financial planning. Good debts can be a successful investment, while bad or unsecured debts require complex administrative methods. In general, debts require sustainable management; therefore, it is important to contract with a specialized debt collection agency to ensure that your debts are secure and that you can recover them whenever you want.