Being overloaded with debt is not a pleasant experience for anyone. There comes a time when you know you won't be able to pay even the minimum debt payments and still cover day-to-day living expenses. When that happens, it's time to consider debt relief for unsecured and secured debt.
Unsecured and Secured Debt
Any debt not secured by an asset is an unsecured debt. Credit cards are unsecured. Personal loans and most medical bills are unsecured. Payday loans and pawnshop loans are secured by your postdated check or permission to debit your bank account in the case of payday loans. Pawnshop loans are secured by the asset you've given the pawnshop. A mortgage is secured by the home. Some furniture stores secure the purchase of furniture on credit with the furniture you've purchased.
Renegotiation
Renegotiation is working with your creditors to bring down the interest rates and waive any late fees so your payments are within reach. This is possible on secured debt such as the mortgage on your home and unsecured debt such as credit cards. If the interest rate is 18 percent and you're able to get the creditor to bring it down to 9 percent, or even less, your monthly payment will substantially decrease and the debt will be paid off more quickly.
Credit Counseling
The credit counseling company goes over your income, expenses and assets and works with you to develop a budget that pays off as much of your unsecured debt as feasible within a two-to-five-year time span. You may have to sell assets and put the cash toward debt payment. The credit counselor works with your creditors to renegotiate interest rates and minimum payments. Previous penalties for late payment may be waived. You pay the counseling company one payment each month. The company then pays each creditor per the new agreement. Credit counseling works primarily for unsecured debts.
Debt Settlement
Simply put, you work with each unsecured creditor to come up with a payoff amount that's from 20 to 50 percent less than what you owe them. This payoff is a lump sum payment. Once they receive that payment, the remainder of the debt is forgiven. Debt settlement may have income tax implications because the forgiven debt may be considered income. Be careful when using a debt settlement service. The fees may be high. You pay the service every month until enough money has accumulated to pay off the loan at the negotiated amount. If the service goes out of business, or is unethical and doesn't pay the creditor, you still owe the money. Until the lump sum payment is received by the creditor, they may proceed with litigation.
Bankruptcy
Bankruptcy requires a court procedure and a federal judge to declare you are no longer responsible for paying your debts. Nearly every type of debt may be included in a bankruptcy, with the exception of past taxes, federal student loans, child support arrearage and alimony arrearage. You will have to sell assets and put the cash toward the debt payment. Secured debts such as a car loan can be included, but the lender will take back the asset, such as a car. Foreclosure on a home mortgage is stopped by a bankruptcy, but arrangements for arrearages have to be made with the mortgage holder.
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