When you’re overburdened with unsecured debt, it can seem very confusing determining what to do about it. Oftentimes, people may jump to the conclusion that bankruptcy is the only way to eliminate their financial problems. However, this is usually an emotional decision. There are alternatives to bankruptcy when you have unsecured debt that seems like you can’t afford to pay. Debt settlement is one of those alternatives. Instead of paying excessive late fees and high interest rates, you may be able to get your creditors to agree to allow you to pay less than what you owe. That also includes the principal. Read on to get a better understanding of how to settle unsecured debt such as credit cards and hospital bills.
What exactly is an unsecured debt?
Before discussing settlement, it’s important to accurately define an unsecured debt. So here’s a simple and easy to understand description. Many times, a financial institution will require collateral before issuing a loan. Collateral is simply something of value of which the bank or other financial institution can take ownership in case the loan can’t be repaid. It’s the financial institution’s way of making sure they can’t lose no matter what the outcome. If nothing else, it’s a means of limiting their loses if you can’t pay. Traditional banking worked on the use of collateral to secure their loans in the event something went wrong.
However, unsecured debt has no collateral. Financial institutions, commonly credit card companies, allow people to first have access to money with no means of securing it with anything else. Credit cards aren’t the only form of unsecured debt. Car loans, mortgages, hospital bills, and educational loans can all be forms of unsecured debt. It’s basically any credit that is extended to an individual or business without collateral.
Debt Settlement. What is it?
There are many options out there for dealing with too much debt. You are probably aware of bankruptcy. However, there are other options which may lead to you getting out of debt and even becoming debt worthy again much faster. Debt settlement is one of those options. It’s the process where debts are negotiated to be reduced. As an example, suppose you owe $10,000 dollars of unsecured debt to various credit cards. Instead of filing for bankruptcy, you decide to settle those debts. An agency or attorney works on your behalf to negotiate with the credit card companies. They tell them that you’re considering debt settlement as opposed to bankruptcy. Instead of getting nothing, the credit card company decides to play along because they would rather receive something instead of nothing. Now, after the negotiation, let’s suppose the credit card companies agreed to accept 50% of what you actually owe them. Then, you would be responsible for paying back only $5,000 instead of $10,000. If you are able to financially afford paying back the $5,000 then you can avoid filing bankruptcy. You will also be much more likely to have credit extended to you again once you’ve demonstrated a more responsible pattern of making monthly payments on a regular basis.
The Major Advantage of Unsecured Debt Settlement
One of the benefits of unsecured debt settlement is the ease with which the process can be maintained. Debts are normally consolidated into one monthly payment. That means you only need to think about making that one payment instead of the hassle of dealing with multiple cards and bills. It also allows you to budget your money much better without missing any payments. With many different payments, it’s easy to think you can miss on one card or another and expect to make it up later. However, there’s no room for that kind of thinking with one monthly payment. You know exactly how much to expect to pay. That allows you to budget for all of your other needs much better. It also allows you to examine the difference between what you truly need and what you’re simply spending money on for luxuries or spontaneous purchases.
Should you use a third party?
Third parties such as settlement companies and debt settlement attorneys can be very helpful saving you a lot of time and emotional discomfort during the debt settlement process. You should not have to pay any up front fees. In fact, it’s very common for debt settlement scams to insist on up front fees, so be careful when searching for someone who can help you. However, many legitimate companies and firms will still charge a certain monthly amount to perform services on your behalf. With some new laws that came into effect on July of 2010, you won’t be liable to pay for the services if the third party is not able to successfully negotiate or settle your debts.
You should never expect to pay more than 15% of your monthly payment when using a third party. And be wary of companies who charge excessive and vaguely described fees. You shouldn’t have to pay more than is necessary to get yourself out of debt. The companies that truly want to help won’t charge you those excessive fees anyway.
