About Debt Cures

Curing or eliminating debt may be a necessary step for people who are over their head in bills. Legally there are several debt cures.

Debt Settlement

Debt settlement is used when most of the debts are not secured against an asset such as a house, car or furniture. Secured debt means that if the debt is not paid, the asset can be repossessed by the lender. Unsecured debts, or debts not secured any asset, can include credit cards, personal loans, store credit, and medical and dental bills.

When settling a debt, the lender agrees to take a payment that is less than the full amount due; upon receipt of the payment, the lender settles the account. The payment can range from 50 to 60 percent of the full amount. In rare cases, the lender will take less than 50 percent. When the agreed-to amount is paid, the debtor no longer owes the debt. Until the amount is paid, the lender can proceed with legal action even while in negotiations with the debtor.

Debt settlement has a negative impact on the debtor's credit rating because the written-off amount, the amount not paid, is reported to the credit bureaus.

Additionally there may be tax implications. Debts that are forgiven may be considered income and taxable as such.

Debt Consolidation

Debt consolidation is used for unsecured debts. The debtor takes out a new loan and pays off the unsecured loans with the proceeds. The new loan will most likely be a second mortgage on real property--the debtor's house, for instance. The current mortgage can be refinanced for a larger amount and the excess used to pay off debts. In most cases, the debtor is in a better position financially because the interest rate on the second mortgage, or refinancing, is less than the interest on the current debts and the loan is for a longer time, resulting in a payment that is less than the total of the previous monthly debt payments. There is no impact on the debtor's credit rating because the debts are being paid in full.

Debt Counseling

The counselor goes over the debtor's income, assets and budget to determine a new debt payment. The debtor may have to sell assets or increase his income to qualify for the new payment. The counselor negotiates with the unsecured lenders for a longer time period for repayment and a decrease in the interest rates. Sometimes the lender will also agree to waive late fees and other charges. The debtor makes the new payment to the debt counselor who then pays each creditor. The debts are paid in full but over a longer time period and at a lower interest rate.

Bankruptcy

A bankruptcy is a court proceeding that legally absolves the debtor from the debt. In essence, the debt no longer exists. The lender has no rights to the money and cannot attempt to collect it through any method. Since the debt has not been forgiven, there are no tax implications. However, a bankruptcy is a permanent stain on the person's financial record. It is not reported on a credit report after 10 years, but many employment, insurance carriers and lenders ask if a bankruptcy has ever been declared.

Statute of Limitations

There are statutes of limitations on how long a creditor can pursue legal remedies in collecting a debt. The limitation varies by state and country and ranges from 3 to 10 years. The debt cure is simply a matter of time.