Much of the modern world is built around a system of borrowing assets, and if you have ever taken a loan for school or had a credit card, you have participated in that system. This type of financial relationship eventually requires that one side assume a level of debt that also comes with some risk of default. This debt can be private, or it can be public, which impacts how the debt can be collected.
Private debt is debt that is accumulated by individuals, households, businesses, and even private nonfinancial entities like not-for-profit organizations. Public debt is debt that is accumulated by government bodies locally, on a state level, and nationally.
The debt that most people are concerned with and focused on daily is their individual private debt, or the debt of their family or household. This debt can accumulate over the years to incredibly substantial amounts, and those individual accounts will stay on your credit report for years. In many cases, the debt can even be contracted out to collectors or sold to willing buyers.
What Is Considered Private Debt?
Private debt is when one party borrows money or is extended a line of credit by another party. This creates a situation where one party then owes the other party money, with certain terms applied to the borrowing and requirements applied to the payments.
This can happen relatively easily, and sometimes a form of private debt like a credit card or payday loan can be the only way out of a tough situation. Other examples of private debt include home loans and loans to buy vehicles, as well as lending that happens on a larger scale. Corporate debt is considered private debt, as are venture debt and mezzanine debt. Private debt can be any debt that does not belong to a public entity like a government body.
What Is A Private Debt Collector?
A private debt collector is any company or organization that specializes in the recovery of money owed to creditors by debtors. Many of the debt collectors that work with fresh debts are hired by the company that is owed the money and operate on a commission basis. This means they are motivated to collect based on receiving a percentage of the total amount of debt collected.
There are other forms of debt collectors, however, that deal with debt that is much less fresh. In cases like this, the debt collectors are companies that purchase older debts at a small fraction of their original value in the hopes of collecting the full amount anyway.
There are even companies that will buy debt that is seven years old or more, debt that has already been removed from credit reports in many cases, and then pursue collection efforts. Even if the debt has been removed from the consumer's credit report, if the collector can convince them to pay anything on it, it will put it right back on the credit report. This is why these types of private debt collectors are known as "zombie" debt collectors.
Private Debt Collection Regulation
Collecting debt isn't a free-for-all, though. In the US, private debt collectors, also known as "collection agencies," have considerable regulation and monitoring imposed on them by the Federal Trade Commission, or FTC. The FTC is the primary enforcer of the Fair Debt Collection Practices Act, or the FDCPA, which is vital to making sure that the collectors abide by certain standards and operational guidelines.
While you may owe a debt, you don't deserve to be harassed, and the FDCPA goes to considerable lengths to prevent that. It bars collectors and collection agencies from using any deceptive or unfair practices, as well as any abusive behavior. This prevents them from calling too early, too late, too often, or threatening the debtor with harm or arrest if they don't pay. Additionally, they cannot seize property or assets unless a judge has ruled that they can.
Types Of Private Debt
There are many types of private debt, nearly as many types as there are companies trying to collect it. Anytime someone extends you a line of credit or financing, it creates debt automatically, so it's not uncommon to have many different types of debt be part of your financial state.
Private Individual Debt
Credit cards are one of the most common forms of private debt, and they make up a significant portion of the overall national consumer debt market. Credit card products are made available to consumers in almost every category, from those with significant flaws and troubles in their credit history to those with credit scores over 800. Not only do they often have fees associated with their use, but credit card debt carried month-to-month also carries interest charges.
Payday & Title Loans
Often referred to as predatory lending, companies that offer payday loans, vehicle title loans, or other similar, high-interest installment loans make up a significant portion of private debt that is defaulted on and subsequently goes to collections. This debt targets low-income individuals with less-than-ideal credit that simply don't have any other options for more economical debt.
People take out loans all the time for things like debt consolidation, education, professional development, even home renovations. While often taken on at a much lower interest rate than payday loans or credit cards, personal loans still have considerable interest charges and can add surprising amounts of debt.
This is a form of debt that is all but mandatory in many places in the nation, with people often being unable to efficiently navigate their city or commute to work without a vehicle. However, most of those people are unable to pay for their vehicles with cash, and frequently have the amount financed with an auto loan. This results in auto loans being incredibly common forms of private debt and are often debts that are sold several times and pursued as long as possible by collection agencies.
Another incredibly common form of private debt that individuals take on is mortgage debt. In order to buy even modest homes, most people will need to take out a mortgage from a mortgage lender. Mortgage debt is a debt that is more complex and costly to take on, but it also has a far longer-term than other debt, often having terms of 30 years. Mortgage debt is one of the costliest types of debt for the consumer, and defaulting can mean losing their home.
Private Organizational Debt
Direct lending is where a loan is made to a company without a financial intermediary, often for mid-market organizations. Direct lending may not only involve second lien loans but revolving credit as well. In increasingly common scenarios, this involves unitranche facilities.
Distressed debt is buying debt securities via the secondary market, instead of creating a new debt or equity. This makes distressed debt different from many other types of private corporate debt.
Infrastructure debt is debt taken on for purposes of developing the business as well as investing in existing assets like buildings. This debt will frequently have very long terms, often more than 30 years, due to the long useful life of the potential assets.
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Mezzanine debt is a type of subordinated debt and is often used in leveraged buyout scenarios. Mezzanine debt also generally has features like preferred equity and warrants, which increase the value of the debt itself.
Real Estate Debt
Real estate debt is often the basis for many direct lending arrangements, and the most common strategy for taking on real estate debt is direct lending with the eventual objective of acquiring the property. This will also sometimes include the purchase or sale of securitized real estate loans from the secondary lending market. The risk profile of real estate debt can be aligned with the risk tolerance of the investor, based on the risk profile of the underlying property.
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In some cases, a company may be extended debt financing with financial backing from venture capital sources. This can help many new business owners or entrepreneurs get off the ground easier since venture debt can help bolster the company's financials without diluting ownership. It is most commonly used to help absorb capital expenses and fund growth. The average venture debt is short-term or mid-term financing and is usually provided by banks focusing on venture lending and occasionally by non-bank financial institutions.
The Difference Between Private Debt & Public Debt
There are countless forms of debt that we've only just scratched the surface, and sometimes it can make it seem more complicated than it is to keep the private debt and public debt separate. Public debt is going to be the debt that your government takes on in the name of the public itself, so the debts are taken out in our collective name. Private debt will always be debt that individuals, households, and companies agree to take on from a lender, and will not apply to anyone else.
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Shawn Manaher is a former financial advisor, has founded 5 online businesses, and is a coach, speaker, podcast host, and author. He's been featured on The Consults Corner on TAE Radio, The Writing Biz, What's Your Story, and more.