Eliminate Debt Without Bankruptcy
The Differences of Secured vs. Unsecured Debt
Unsecured debt, unlike secured debt, is debt without any collateral. So a creditor that provides you with an unsecured loan assumes a larger risk if later you are not able to pay back the loan. Due to this risk, unsecured creditors often charge much higher interest rates on their loans as opposed to secured loans. Subsequently, this leads to people often getting in over their head with unsecured debt due to interest rates that they are unable to ever catch up with. So what are your options when you do not have access to lower priced secured loans or find yourself with too much unsecured debt?
Tapping Into Your Home Equity
If you’re a California homeowner, you may be eligible for a home equity loan, or home equity line of credit (also known as a HELOC). Eligibility for these loans, of course, requires that you have home equity, meaning your home must be worth more than you owe on it and also require good to excellent credit scores. Accordingly, home equity loans are not an option for many people who find themselves in difficult financial situations. Nevertheless, if you can qualify for a home equity loan, it is an appealing option because of the low interest rates generally associated with such loans (usually around 8%, compared to the 15-20% charged by most credit cards) and the single monthly payment. Moreover, the interest you pay on home equity loans is generally tax-deductible. Taking out a home equity loan however does not actually eliminate debt but may actually increase or extend your debt by just shifting it from several high-interest accounts to a single lower-interest account.
Recently, many people have been using home equity loans to consolidate their credit card debt. On the one hand, obtaining a secured loan such as a home equity loan is preferable because it enables you to obtain a lower interest rate. On the other hand, you run the risk of losing your home if you fail to make payments on time. Thus, non-homeowners and homeowners alike sometimes elect to take out an unsecured debt consolidation loan to reduce monthly payments. Approval for an unsecured loan is based on a combination of your income, credit and payment history (FICO score). Consequently, unless you have exceptionally good credit or a family member who is willing to co-sign, unsecured loans can be hard to come by. If you do get approved for an unsecured loan, it will likely come with a high interest rate.
The bottom line is, you may not save any money in the long run, nor will you eliminate your debt any faster if you elect to take out a debt consolidation loan with a high interest rate. Rather, by “robbing Peter to pay Paul,” you will have simply replaced your old debts with new, longer-term debt. Additionally, because debt consolidation results in the closing of several old accounts (which have been absorbed by your new lender), it could actually have an adverse effect on your credit score, which takes into account longevity of credit history.
Filing Chapter 7 or Chapter 13 Bankruptcy
Despite the recent surge in the number of bankruptcy filings each year, bankruptcy remains the least favorable way to eliminate unsecured debt. This is due to the many drawbacks associated with bankruptcy, among them feelings of shame/embarrassment and a destroyed credit score. Unlike debt settlement, which may negatively impact your credit score in the short term, filing for Chapter 7 or 13 bankruptcy remains on your credit report for 7-10 years, making it difficult to obtain new credit.
If most of your debt issues are with unsecured debt, debt settlement may be a practicable solution to eliminate it. Creditors know that they will end up with nothing in the event that you have to file bankruptcy, and because of this are more willing to negotiate settlements or reductions on the remaining balances. Indeed, creditors have been known to settle accounts for 50% of what is allegedly owed. The key is in knowing how to negotiate with your creditors and to be diligent about documenting and recordkeeping. For this and many other reasons, people prefer to hire a professional to handle the negotiations and settlement process. If you do choose to hire a third party to do the negotiations for you, be sure to do your research beforehand, as there are many illegitimate companies out there looking to exploit consumers burdened by debt and typically they are unable to reduce the debt down to the same numbers as experienced debt attorneys are able to.
We are a a debt settlement law firm with offices in the Los Angeles, San Diego, San Francisco, and other California areas. If you have questions or would like to speak with an experienced debt settlement attorney, give us a call today for a FREE consultation.