Unsecured Debt Problems

When you accumulate debt, it's categorized in two ways: secured and unsecured. Secured debt is a type of debt tied to a piece of collateral, such as a mortgage that is tied to your house. Unsecured debt is not tied to any collateral, which is the case with credit cards. When you have too much unsecured debt, it can be a particularly stressful time in your financial life.

Unsecured Debt Issues

One of the issues with unsecured debt is that it typically carries with it a high interest rate. When compared with unsecured debt, secured debt has a lower rate because the lender knows it can take back your property if you do not pay. Unsecured debt carries no such assurances for the lender, and you are charged more as a result.

Unsecured Debt Consequences

If you cannot afford to make your debt payments, creditors could file lawsuits against you and the court could deliver a judgment against you, allowing the creditor to garnishee your wages or levy assets from your bank account. When this happens, it can also significantly damage your credit rating, which impairs your ability to borrow money in the future.

Eliminating Unsecured Debts

When you are in trouble with unsecured debt, you have a few options to eliminate the debt. If you have only a few accounts with unsecured debts, you could try to settle them for less than you owe. Another option you could consider is filing for Chapter 7 bankruptcy. When you file for Chapter 7 bankruptcy, you can get all of your unsecured debts discharged legally by bankruptcy court. When this happens, the creditors can no longer attempt to collect the debt from you. This option should be considered only as a last resort, as it is quite damaging to your credit.

Consolidating Unsecured Debt

Some people make the decision to consolidate their unsecured debt into a loan. For example, many people take out a home equity loan and then use that money to pay off their creditors. When you do this, you are essentially taking unsecured debts and turning them into secured debt. This can be dangerous because your house is now tied to the debt. Before taking this step, it is important to determine if it is in your best interest as a debtor.