Eye On the Money: Test Your Debt Knowledge

Taking out a mortgage on a home is generally a good kind of debt. Not only does a home loan typically have lower interest rates and tax benefits, but a house's value could increase over time, making it a good investment, unlike credit card or cash advance debt.

Because of the strategic combination of interest rate and minimum monthly payment, credit card companies make more money from you in the long run if you consistently pay only the minimum monthly payment.

Unsecured debt refers to debt not backed by collateral. Credit card debt is one such example of unsecured debt. A mortgage would be secured debt because it is backed by the house.

If you can get a lender to agree to debt settlement, it will probably mean you pay a lump sum of less than your total balance and will end your debt with them. However, it may end up on your credit report and probably make it harder to get a loan in the future.

Most likely, consolidating your loans will mean a lower interest rate and one simple monthly payment. But it will also take you longer to get out of debt, and you'll pay more in the long run.

Although they may have a legal right to sue you, debt collectors can’t use the threat of a lawsuit to coerce you into making a payment. The FDCPA also forbids them from contacting you via postcard. Additional federal law prohibits various other means of contact, too.

Entering into bankruptcy can help to alleviate your debts, but it'll also affect your credit rating and your ability to borrow money in the future. So although it can be a good option for those who need it, personal bankruptcy should be a last resort after other alternatives have been exhausted.

In most cases, negative information stays on your report for seven years. Bankruptcy, however, can stay on for 10 years.

Zombie debt is old debt that has expired, is the result of identity theft or has been settled in bankruptcy.

The typical personal bankruptcy is called Chapter 13, in which the debtor retains some assets -- like a home or car -- and is required to adhere to a court-ordered debt repayment plan in which a percentage of his regular income is used to pay off creditors. Unless you're a municipality or a corporation, you probably won't be filing Chapter 9 or 11 (although people with very large debts can file for 11).