How to Handle Secured Debt
A good rule of thumb when determining which bills to pay first is to pay more attention to any debt that is secured by collateral or assets, then pay unsecured debts. Usually, secured debts are fixed by an asset, for example, the loan you signed to purchase your car is secured by a lien on your vehicle, as well as the mortgage loan on your home is secured. If you stop making payments, providers can initiate a repossession or foreclosure.
Unsecured debts are not tied to any particular asset, and most of these debts are typically owed on credit cards, medical bills, or personal loans.
If you are late paying your mortgage installments, immediately contact your mortgage lender to discuss alternatives and avoid foreclosure. If you act in good faith, and if it is a temporary situation, most lenders are willing to try and resolve the problem. Some lenders agree to reduce or temporarily suspend payments, however, when you resume regular payments, you may incur inflated fees on the total amount not paid on time — the arrears. Other lenders may agree to a modification of the terms of your mortgage loan to reduce the monthly payment. See if additional charges will apply to extend the payment period and calculate how much will be added over time.
In most agreements, auto financing provides that if you fail to pay the installments, the creditor can recover or repossess your car at any time. Your creditor is not required to give prior notification. If your creditor seizes the car, you will have to pay the outstanding months owed to recover the car, otherwise, the vehicle will be permanently repossessed and resold. You’ll then be responsible for the balance on the loan, plus the cost of hauling and storage. If you realize you cannot pay the loan in installments, you might be better off selling it on your own and pay off the debt. This allows you to save additional costs from a seizure and prevent the creditor from reporting negative information on your credit report.
Alternatives to Paying Off Debt
There are many tempting traps available to get you out of financial peril and into years of hardship including:
Bankruptcy – Bankruptcy is really the “end of the line” for the debtor who is drowning in debts. Under the new bankruptcy rules, the court will apply a “means test” to determine your eligibility. So this is not a sure thing.
Debt Consolidation – Typically, you will need to qualify first and any debt consolidation always involves borrowing money and some pledge of collateral to pay off all or some of what you owe. In other words, you trade multiple debts for a single large debt.
Consumer Credit Agencies – What many people don’t know that often, banks and creditors themselves fund these agencies.
Climbing out of debt may seem difficult but every achievement starts with a small step. By being persistent and calling creditors to work on new payment terms, you’ll be that much closer to resolving any financial perils.
Adam Vaught is a personal finance consultant. He enjoys sharing his insights on various personal finance blogs. Visit the homeinsurance.com/home-insurance-101/ to learn more about home insurance essentials.