Let’s take this example: Tom borrows money from a lender specialized in different types of loans. The lender deposits Tom’s bank account with the requested amount and does not require him to place anything as collateral for settlement of the debt in case he defaults payment. Consequently, Tom has an unsecured debt, which is a financial obligation that requires no security.
Generally, debts fall into two categories, secured and unsecured. The critical distinction between the two is the absence of collateral for the later. Despite the lack of security for unsecured lendings, there are various measures that creditors take to recover their money.
Types of unsecured debts
There are several types of secured debts, with the most common ones being credit cards, student loans, medical bills, and some personal loans.
Lenders specialized in credit cards approve the application for new credits based on the borrower’s credit score and income. However, there are secured credit cards that require some form of collateral, especially cash deposits, to be made with the lender. On a different note, medical bills can also fall under secured loans since no guarantee is demanded before seeking medical attention. Student loans, which cannot be written off by applying for bankruptcy, also fall under the unsecured category. Not to forget are the utility bills and peer-to-peer loans.
What happens if you default unsecured debt?
According to a renown philadelphia foreclosure lawyer, just because a loan is unsecured does not mean that a debtor will swiftly get away with the amount owed without any consequences. There are several measured that an unsecured creditor can take if you breach the lending terms. The very basic action (which is usually the first step) is contacting you severally for a limited period in a bid to collect the payment.
If dialogue fails within a set time frame, the lender can either report the defaulter to a credit reporting agency or file a lawsuit, or both. Consequently, a credit reporting agency significantly lowers a delinquent’s credit-worthiness quotient, limiting his or her ability to get loans from any lending institution. On the other hand, a lawsuit could grant a lender with a court judgment warranting them to proceed with the collection of remedies.
How to manage unsecured debts
If you are in the initial stages of defaulting your debt and your creditor calls to place inquiries on the settlement, you can negotiate for and honor favorable settlement terms. A debt settlement specialist can play significantly useful in advising one and speaking to the creditors on his or her behalf.
On a different note, if an unsecured debt has saddled a delinquent into the realms of court sanctions, then it is best for him or her to seek the services of a reliable attorney. The debt settlement lawyer or bankruptcy attorney can work ‘round the clock to stop the foreclosure of one’s home, and based on the debtor’s financial hardship and other mitigating facts present them before the Court of Law.
Finally, the above strategies deployed will usually help one get their finances back on track.