Distressed Debt

Distressed debt summary: 

• Distressed debt is debt that belongs to someone who is struggling financially and may default as a result.

• Distressed debts might include credit card debt, personal loans, mortgages, auto loans, and more.

• Debt relief may help those with distressed debt regain control of their finances.

Distressed Debt Definition and Meaning

Distressed debt in a consumer context refers to debt that you are unable to pay. It may also include debt you have already defaulted on. It is a term borrowed from the corporate world that usually describes the securities of a company in default.

Consumers with distressed debt typically have missed payments or may have even stopped making payments on their debts. They are in default on the debt and may be facing a debt collector.

Sometimes it's possible to navigate distressed debt through careful budgeting or credit counseling. At other times, it could be necessary to turn to tools like debt settlement or bankruptcy to take back control of your finances.

Comprehensive Breakdown of Distressed Debt

You don't start out with distressed debt. It happens when you're unable to make your payments and you fall behind or become delinquent.

How you get there depends on your financial situation. Maybe you lost your job or faced another financial hardship, or maybe your budget just got away from you. Regardless of how you got your debt, you still need to deal with it.

Sometimes, this is a temporary problem you can manage through smart budgeting. But when keeping up with your payments is no longer feasible and you're behind on your payments, you've reached distressed debt.

There are ways to deal with distressed debt. The best option for you will depend on your finances. Debt settlement could be an option for unsecured debt—debt without collateral or something of value backing it up. Bankruptcy is another option that could erase many, if not all, of your unsecured debts if you qualify.

Each strategy has its pros and cons. It's best to consider all debt relief options available to you before deciding which is the right one in your case.