All debt falls into one of two categories — secured and unsecured.
Secured debt requires collateral. This can take the form of a home, a boat, a car or some other valuable asset of which a lender can take possession in the event you cannot meet the terms of your loan agreement.
Unsecured debt includes credit cards, student loans and personal loans. Most (but not all) of these types of loans can be resolved with some form of debt relief. Meanwhile, secured debt is usually immune to certain forms of debt relief.
With that understanding, here’s the 4-1-1 on loans and debt relief.
Any type of loan secured by something of value falls under the category of secured debt. The most common are auto loans and home mortgages. In these cases, the car or the house serves as collateral. If you default, the lender can take them and sell them to mitigate their potential losses.
Collateral makes secured debt immune to debt settlement. The lender can simply declare the loan in default and take possession of the property. However, secured debt can be included in debt consolidation plans.
Credit cards, charge cards, medical bills and non-collateralized personal financing such as student loans are among the most frequently encountered varieties of unsecured debt. Lenders typically charge higher interest rates for these types of loans because the associated interest payment are their only form of security.
In most cases, unsecured loans can be resolved by means of debt settlement — if your situation demands it. Now, with that said, only certain types of private student loans can be negotiated as part of a debt settlement program.
However, before jumping straight to debt settlement, reputable firms like Freedom Debt Relief will explore the potential of options such as credit counseling, debt management and debt consolidation.
This debt solution revolves around education. Credit counselors help you develop plans to manage your money and debts. This includes the development of spending plans (also known as budgets) after a careful analysis of your financial situation, to help you get your finances back on track.
If your problems stem from too much debt or an inability to comfortably repay your obligations, credit counselors will often recommend a debt management strategy.
The counselor works with your creditors to develop a repayment plan with which you can effectively operate. These plans sometimes include the waiving of fees and lowering of interest rates to make your loans easier to satisfy in a more timely fashion.
You’ll then deposit money into an account each month, from which the counselor pays your creditors on your behalf.
In some cases, depending upon the amount of outstanding debt you have and your credit rating, it’s possible to put all of your obligations under the umbrella of a single loan.
While this typically requires the pledging of some form of collateral, it can lower your interest rate and monthly payment, which can make your debts easier to repay.
However, it also means trading unsecured debt for secured debt, which could become an issue in one of the two scenarios below.
These plans work similarly to debt management, however wholesale reductions in repayment amounts of most forms of unsecured debt are negotiated with creditors on your behalf.
Again, secured debt is typically immune from this strategy.
Creditors will often agree to settlement because getting some money back is better than getting none at all if they force you to avail yourself of the following approach.
Often considered “The Nuclear Option”, filing for bankruptcy protection usually eliminates all unsecured debt — save Federal Student Loans.
A Chapter 13 Bankruptcy can also stop foreclosures and repossession of other types of collateral for secured loans, though you will not be relieved of the obligation to repay.
It’s important to note that debt management, debt settlement and bankruptcy will lower your credit score. However, like credit counseling and debt consolidation, they can also set you on the path to reestablishing your creditworthiness. Understanding the 4-1-1 on loans and debt relief can help you make the best possible decision when it comes to resolving debt problems.