How to Legally Discharge Your Unsecured Debt & Restore Your Credit Rating

Discharging unsecured debt and restoring your credit rating can either be relatively simple or a long and arduous process. It all depends on the methods that you use. The simplest method to discharge debt is to pay back the principal along with any interest or penalties. Other methods of discharge include bankruptcy, debt settlement, debt consolidation and waiting for the statute of limitations on your debt to expire.

Instructions

1

Pay all debt balances in full along with any interest and penalties to discharge your debts. This is the most expensive method in the short term but it improves your credit rating the fastest. In the long run, it gains you access to superior interest rates, larger loans and better credit cards.

2

Consider settling a debt by contacting the lender directly and offering a portion of the total loan balance. You can request that the debt be marked as "paid In full" on your credit report, or marked down as "settled." If it is marked as the former, it will have a more positive effect on your credit rating. Unfortunately, a debt must usually enter delinquency or be sent to collection for the settlement option to open up. Defaulted accounts remain on your credit report for seven years, so this has long-term damaging effects on your credit report.

3

Contact a bankruptcy lawyer and file for personal bankruptcy in order to discharge all unsecured debts that are allowed by law. All liquid assets, apart from those protected by law, will be sold to creditors. In some cases, a judge may deny your bankruptcy if the court can demonstrate a pattern of frivolous spending and sufficient income to cover your obligations. Bankruptcies damage your credit rating for ten years and can limit access to loans and credit cards beyond that.

4

Wait until the statute of limitations on the unsecured debt expires. These statutes differ by state. Once the statue expires, your creditor will have no legal recourse to collect on your debts. This damages your credit rating for at least seven years.

5

Refinance unsecured debts, such as student loans, that are difficult to discharge through bankruptcy. This will allow you to reduce your monthly payments while preserving your credit score. Refinancing can also free up additional funds to discharge your other debts faster. If your credit score has improved significantly since you initially took out the unsecured loans, refinancing is even more important.