Secured Debt vs. Unsecured Debt in a Settlement Plan

If you are not able to make all of your debt payments but you hope to avoid bankruptcy, you may want to consider a debt settlement plan. A debt settlement plan involves contacting all of your creditors and getting some or all creditors to agree to accept a payment amount less than the full value you owe. For example, if you owe $1000.00 on a credit card, you may offer to pay the creditor a lump sum payment of $500.00 if he will agree to accept the $500 and forget the remaining balance. Sometimes, creditors will agree to do this and allow you to either make one lump sum payment or to arrange a repayment plan that involves repaying less than the full balance. Creditors, when they agree, do this because they believe otherwise they won't get anything at all. However, when you are making a debt settlement plan, it is important you understand the difference between secured debt settlement and unsecured debt settlement.

Secured Debts versus Unsecured Debts

All debts that people have are classified into one of two categories:

• Secured Debt
• Unsecured Debt

Secured debt refers to debt that collateral has been provided for. For example, a mortgage loan and a car loan are both secured debt with the home and the car respectively acting as the collateral. The collateral essentially guarantees the loan, since if you fail to make the payments required, the bank can take the collateral and sell it to get their money. This happens through foreclosure (for homes) or repossession for cars and other secured debts.

Unsecured debt refers to debt where there is no collateral or security, and where the only assurance a creditor has of repayment is your word. Credit card debts and student loan debts are both examples of unsecured debt. There is nothing the bank can take or sell if you do not pay, since they can't take your degree and sell it on the open market, nor can they repossess your trip to Hawaii or the groceries you charged on your credit card.

Because of the differences, unsecured debt is generally much easier to settle. An unsecured creditor has a lower claim on your assets if you were to declare bankruptcy and has less recourse if you simply stop paying, so the creditor is more likely to agree to a settlement to ensure it gets something. With secured debt, however, the lender is likely to not agree to a settlement if it believes it can repossess the item instead and sell it for more than you are offering to settle for.

Getting Help

If you are facing debt problems, it is a good idea to contact a debt settlement lawyer who can help. Your attorney can assist you in better understanding how to settle your debt and can provide you with any options you may have for dealing with the debt you cannot manage.