Bankruptcy can protect you

The worst types of debt: payday loans, co-signed loans, student loans

Victoria MaydanikLife advice from bankruptcy attorney

Most people have had debt of some kind during their lives.  While in the perfect world it may be great to be debt-free, for most of us some debt may be very hard or impossible to do without (for example, a mortgage loan if you want to own a house) and some debt may be worth it in the long run (for example, a business loan if you want to start or develop your business).

What debt is the worst, has the most potential to burden you and hold you back? What debt should you avoid whenever possible?  In my opinion, based on my clients’ experience and what I have seen as a consumer bankruptcy attorney, the following types of debts are the most vicious: (1) payday loans; (2) co-signed loans; (3) student loans.

Payday loans are one of the worst types of debt because they are poorly regulated, often charge insane interest and fees, often ask for various personal information such as a bank account number, and may be difficult to contact and stop. Many payday loan companies, especially online payday loans, are based offshore somewhere on a tropical island; when I periodically search for their  contact information, what I often find instead is notice about government’s efforts to track down that particular company and shut it down or limit its activities. Incidentally, if the company is based offshore and if it’s not clear who the owner of the company is, then practically the orders of the U.S. courts or governmental bodies may not stop them or limit them much. When a person takes out a payday loan, typically the person would be asked to provide personal financial information such as a Social Security number and bank account number, and authorization for automatic continuous withdrawals of the loan principal and (high) interest from the bank account. Some of my clients have had difficulty stopping these withdrawals even after they believed the debt was already paid. If you need a short-term loan immediately, you would be often better off getting a pay advance from your bank or employer, or getting a loan from your retirement plan.

Co-signed loans are another type of what I call “bad debt”.  When you co-sign for someone, it means you are jointly liable with this person for the entire amount of the loan, plus any interest and fees.  You may have an agreement with the other person that he or she will make all payments – but this agreement means nothing to the bank. If the other person makes any of the payments late, it damages your credit.  If the other person stops making the payments for any reason – for example, he or she loses a job or has medical issues – the bank will be coming after YOU to make the payments.  This means a creditor can file a lawsuit against you, and get the judgment to start garnishing your wages, or to put a lien on your house, or to levy funds from your bank accounts.  Often co-signers don’t give this scenario much thought, and may even forget about the co-signed loans. Think about it this way, when you are considering whether to co-sign a loan or lease for someone: do you have the funds to pay for this person’s mortgage, car, business, apartment, or whatever the subject of the loan or lease may be, until it’s paid off?  If yes, great.  If not, you really shouldn’t co-sign.

Another type of debt, which should be avoided or limited as much as possible, is student loans. Do not borrow away freely when you or your kids are in school just because it’s for the sake of education. You may be surprised that I included student loans with the “bad debts.” After all, schools are always telling us that education is always worth it in the end, and once you graduate, you will have a good job and much better career prospects and will be able to pay off the student loans without any problem in reasonable amount of  time.  For many people, it has not quite worked out this way.  Jobs – good jobs at least, the kind of jobs you thought you would have after finishing school – may be scarce.  Employment statistics have often been misleading: while there have been new job openings, and while it is true that most of the students may be employed within a certain period of time after graduation, many of the new jobs are low-wage, part-time, don’t offer good benefits or are not in the field that you wished to be in.  Average tuition and other student costs have been rising much faster than incomes, and student loans do accumulate interest which is not necessarily low.  Additionally, student loans generally cannot be cleared and generally cannot be discharged through bankruptcy, which means that many people have been stuck with thousands of dollars of student loan debt for years, with no resolution in sight.  There is bandage-type temporary help that is available, such as loan deferment or forbearance or income-based reduced loan payments, but for most people there is no permanent relief.

These are just generalizations and of course not everyone who has co-signed a loan, or has taken out a payday loan or student loan had a bad experience. Additionally, there may be other “bad” debts.  However, based on what I have seen, payday loans, co-signed loans and student loans often do the most damage and unsettle the person the most – and often the damage is unexpected.  If you ever consider taking out these types of loans, be very careful and think about other ways to accomplish your goal if possible.