With our busy lifestyles and the pressures of today’s economy, it’s no wonder we’re all more likely to take out a loan than ever before. But what type of debt do you have?
Consumer and non-consumer debts are often confusing because they look the same on paper. However, in reality, they are entirely different regarding how they are accounted for and taxed. But don’t worry!
We’ll explore each of these categories in detail, discuss their differences and ultimately reveal what they mean for you as a consumer.
Understanding Consumer and Non-Consumer Debt
Not All Debts Are Created Equal
Non-consumer debt is another name for debt that doesn’t involve you directly. They could be for your business, or they could be for your home. For example, if you have a mortgage through the bank or credit union for business purposes, it’s considered non-consumer debt.
Consumer debt includes credit cards and other forms of revolving loans such as mortgages on personal or family homes, car loans, and student loans. Those types of loans are typically paid back over time through interest payments or through monthly payments made by borrowers who pay more than they owe each month.
There are also differences in how consumer and non-consumer debts are reported to credit bureaus. For example, when you take out a loan from a bank or financial institution, the bank reports your loan balance as part of its overall asset base. However, when you incur a credit card balance, the creditor does not report this balance as part of its asset base until you pay it off.
How Does Credit Mix Affect My Credit Score?
Your credit mix affects your credit score in two ways. First, it can help you get a car or a home loan because lenders look at the types of loans you have on your credit report and see if you are likely to pay those obligations back.
Second, having a high ratio of consumer debt to non-consumer debt on your credit report will negatively impact your score because it indicates that you have more risk.
The mix of accounts also matters when calculating your FICO® Score, which is one of the most widely used scoring models for determining whether consumers qualify for loans and lines of credit. FICO® Scores are calculated based on data provided by lenders, financial institutions, and other creditors.
Why It Matters When You File for Bankruptcy
If you’re facing a debt crisis and you’re considering filing for bankruptcy, you may be wondering why it matters if your debt is consumer or non-consumer.
Here’s the thing: If you file for bankruptcy, your creditors will automatically be able to go after your assets.
If you have consumer debts, then there is a good chance that you can file for Chapter 7 bankruptcy. That means your creditors will take your property and sell it to pay off your debts.
If these consumer debts are, however, less than 50% of your total debt liabilities, they would be treated in line with Chapter 13 bankruptcy provisions and involve some form of the future repayment plan instead.
Overall, consumer debts are typically more difficult to discharge in bankruptcy. A creditor can object to a consumer’s discharge if they claim that the debt is non-dischargeable because it was incurred for personal use or as a result of fraud.
The Elmer Law Firm in Jasper, Tuscaloosa, and West Alabama hopes that these general insights will help you develop a better understanding of consumer and non-consumer debts and their roles in the bankruptcy filing process. And, of course, if you find yourself in over your head and unable to pay your bills, set up a free consultation with our office, and we can help you work through your problems.