Few people go through their entire lives without incurring some type of debt. When you go in debt, it’s important to know your rights and obligations. These rights and obligations vary according to the type of debt contract you enter into.
By definition, a contract is the exchange of promises between two people. This can take on many forms. When it comes to debt, there are four basic types of contracts:
* Oral contract ? This type of debt contract has been around since the beginning of time. It simply involves one person lending another person money, and the borrower agreeing to repay that money. Nothing is put in writing.
Oral contracts are legally binding. The problem with them is that they are more difficult to enforce. This is due to the fact that there is no written proof of them. There may not even be any witnesses to the agreement except for the two parties. Due to these factors, it may be difficult for the creditor to collect.
* Written contract ? A written contract may be as simple as an agreement written on a piece of notebook paper, or as complex as a multi-page document. When a loan is involved, the terms are defined and the contract is signed by the creditor and the debtor. This type of contract usually holds up well in court, even if it is created informally.
* Promissory note ? A promissory note is very similar to a written contract, but there is an important difference. In a promissory note, the payment schedule and amount of interest charged are spelled out. Promissory notes are rarely informal agreements. Examples include mortgages and auto loans.
* Open-ended accounts ? An open-ended account usually does not require a traditional contract. It is a revolving line of credit in which the balance varies. The most recognizable example is a credit card.
The category under which a given debt contract falls may sometimes be confusing. Oral contracts are easily identifiable as such, but there is often confusion about the subtle differences between a written contract and a promissory note. Credit cards are open-ended accounts, but there have been cases in which creditors have attempted to enforce them as written contracts. But in the absence of an actual written agreement, this would not hold up in court.
No matter what type of debt contract you enter into, it’s important to read it carefully. No matter how reputable the creditor may be, it’s essential to know the terms to which you’re agreeing before you sign anything. It’s also a good idea to familiarize yourself with the laws governing the different types of debt contracts. If you need assistance, an experienced consumer rights attorney can help.
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