A debt settlement program takes your debt and reduces the amount you owe. This means that your creditors will forgive a portion of your outstanding debt. Most creditors will not agree to debt settlement unless you have fallen behind on your payments. It is an option if you are overwhelmed with debt, but it will negatively affect your credit score. Secured debt cannot be included in a debt settlement program.
What Is Secured Debt?
Secured debt is debt that has an item that stands as collateral for the debt. A mortgage, a car payment or a title loan are all types of secured debts. You cannot include secured debt in a debt settlement program because the item that you used for collateral will need to be turned in if you default on the loan or try to settle the loan for less than you owe. This is true even if you have paid off most of the loan.
Ways to Get Rid of Secured Debt
It is difficult to get rid of secured debt unless you are willing to turn over the item you used as collateral on the loan. Often you are better off selling the item and paying the difference on the loan than voluntarily giving up the item to get rid of the debt. If you are having difficulty making your payments, contact your lender to see what options you have to reduce the debt.
Set Up a Debt Payment Plan
A debt payment plan is the best way to get rid of both secured and unsecured debt. This payment plan will help you pay off your debt more quickly, without negatively affecting your credit score. List your debts in order of your highest interest rate to your lowest. Find extra money in your budget to pay on your debts and apply all of it to the first debt on your list. Once it is paid off, move to the next debt on your list, applying all of the money you were paying on your first debt to it. Continue until you have paid off all of your debt.
Avoid Moving Unsecured Debts to Secured Debts
Many debt consolidation loans are tied to your home as a second mortgage or to a car as a title loan. When you use a debt consolidation loan to pay off your credit cards, you may move your unsecured debts to secured debts. This means if you have trouble making payments in the future, you can lose your home. Although the interest rate is higher if the loan is unsecured, you are not putting your home on the line.
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