How Does Unsecured Debt Settlement Help? A Viable Bankruptcy Alternative
Written by Arbitrage • 2020-12-20 00:00:00
If you are looking for a bankruptcy alternative, it is worth considering unsecured debt settlement. It is amongst the most effective strategies to save money for those who are over-burdened with debt. It not only helps reduce the principal (amount owed), but it also improves affordability.
Unsecured Debt Settlement
A debt settlement program involves an intermediary negotiating with creditors to change the terms of one or more credit agreements. This can help to reduce the amount owed by up to 50%; any remaining debt can then be cleared over a period of 12 to 36 months. The management charge for handling the administration of this program is typically 15% of each monthly contribution. The debtor will be made aware of how much they will need to pay each month before the program commences.
It is important to avoid debt settlement programs where any fees are charged up-front. This could create problems in the future if the debtor is unable to continue making repayments. The last thing someone with a financial problem needs is to increase the amount they owe.
A Bankruptcy Alternative
Unsecured debt settlement works in a similar way to chapter 13 bankruptcy, but without the associated stigma or publicity. A possible negative is that the debtor isn't afforded the same court protection as someone who files for bankruptcy. Should a debtor be unable to afford a monthly repayment to creditors, chapter 7 bankruptcy may be the preferred course of action. However, it will only be suitable for those who have an income that is below the median for their state and have few non-exempt assets (valuable collections, second home, etc.).
FICO Credit Score
An unsecured debt settlement program will have a detrimental effect on a credit score because it involves defaulting on the terms of a credit agreement. However, the overwhelming majority of those who enter a debt settlement program have already missed and made late payments. It is also important to understand how FICO credit scores are determined before gauging the true effect of a debt relief program. While 35% of the score is determined by punctual repayments, 30% of the score is concerned with the type of debt and amount owed. The latter part of this figure (reducing debt) will actually be improved by unsecured debt settlement. Until finances are brought under control, money problems and default are virtually inevitable. The sooner a debt settlement program commences, the quicker a FICO credit score will start to improve.
Anyone looking for a suitable bankruptcy alternative should seriously consider unsecured debt settlement. It is not just a credit card debt solution; it is a way of dealing with most forms of unsecured debt. Given that it is possible to write-off up to 50% of the amount owed, it is among the most effective strategies to save money.