There is a lot of confusion surrounding the difference between debt and default, but it’s an important distinction to understand. A debt occurs when you borrow money and agree to pay it back over time. A default happens when you fail to make a payment on your loan or credit card, which can lead to legal action. It’s important to know the difference so you can protect yourself and make informed financial decisions.

Check to see if you owe any money. If you think the debt isn’t yours or that the amount demanded is incorrect, get verification from the collector (such as documents or account statements). It’s up to the collector to provide this information. Get independent counsel if you’re still unsure whether you have to pay part or all of the debt. Every state and territory has free legal aid and neighborhood legal assistance available.

The failure to make essential interest or principle payments on a debt, whether it’s a loan or a security, is known as default. Individuals, businesses, and even nations may go into default in some circumstances. Creditors face significant concerns regarding default risk.

A default can occur on secured debt, such as a mortgage loan backed by real property or a business loan protected by the company’s assets. If a borrower fails to make scheduled payments, the loan may go into default, putting the asset used to secure it at risk. Similarly, if a firm is unable to make coupon interest payment on its bonds, it would be in default.

Defaulting on an unsecured debt, such as a credit card balance, is another typical reason for defaults. A default lowers the borrower’s credit rating and might limit their ability to borrow in the future.

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Source: Jasper