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The credit system is extremely complex and it is important
for consumers to know their options before taking action regarding debt
problems. Many people have a high level of what is known as unsecured debt.
Unsecured debt is basically debt that is not secured by some form of collateral
such as a home or auto. Credit cards, credit lines, personal loans, overdraft
lines and similar types of debt are considered unsecured. Certain debts such as
medical bills, collection accounts, cellular phone bills, utility bills and
related items are also unsecured.
Any debt that relates to a financial institution is subject
to strict regulatory guidelines which require the bank or lender to "Charge
Off" or write off these debts after a certain period of delinquency. Lenders
would much rather settle a debt at a substantial discount than write it off and
have to sell it as part of a pool of bad debts for a greater discount than a
direct settlement with the consumer. In general the credit system works under
several general principals which can be used to the advantage of the consumer
in the unfortunate event that through illness, medical problems, unemployment,
divorce or other similar event the consumer becomes unable to pay his or her
debts.
1. CREDITORS WILL ROUTINELY OFFER A SUBSTANTIAL DISCOUNT OF
UNSECURED DEBTS, EVEN IF THEY ARE NOT DELINQUENT. Credit grantors such as
credit card companies have formulas they use to determine what level of
delinquencies and charge-offs they expect to experience in their portfolios,
this ranges from 3-5%. The cost of this delinquency rate is factored into the
interest rates charged by the credit card companies. Such creditors will
discount debts from 25% to 75% if a proper request and negotiation is
undertaken.
2. CREDITORS WILL OFFER A PAYMENT PLAN ON A DISCOUNTED DEBT.
Although it is more advantageous to pay off a debt as part of a lump sum
discount, creditors will usually allow a payment plan of 1-year or less to make
payment on a discounted settlement.
3. A PAID "CHARGE OFF" ACCOUNT IS AS NEGATIVE AS AN UNPAID
"CHARGE OFF" FROM A CREDIT STANDPOINT. This is generally the case. If you are a
consumer who has a charged off account or an account that is about to charge
off, it is better to negotiate a discount on the charge off than it is to pay
it in full. Except for the fact that the debt may be satisfied the fact that a
charged off account is paid in full is as negative as not having paid the
account at all. If an account is "settled" your credit standing may be less
affected than if "charged off". The same is true for collection accounts,
unless a negotiation is undertaken to remove them from the credit report as
part of payment it may not be fruitful to pay these accounts, which also may be
discounted, unless a proper procedure is followed.
4. A SIMPLE LETTER WILL STOP CREDITOR HARASSMENT AND FORCE
CREDITORS TO DEAL WITH YOUR ATTORNEY AND CONSIDER DISCOUNTED DEBT OFFERS.
Because of past abuses there is a law called the Fair Debt Collection Practices
Act which prevents harassing creditor or collection agency calls if the
creditor is put on notice that you are represented by counsel and that you do
not wish to be contacted. Once this notice is in place the collection and
creditors must make all communications through your counsel who can use their
experience and knowledge of the law to negotiate the best discounted settlement
of your debts.
BANKRUPTCY SHOULD BE A LAST RESORT. A Chapter 7 bankruptcy
may result in what as known as a "discharge" of all your unsecured debts.
Bankruptcy is a drastic step which will impact your credit and which can be
reported on your credit report for up to 10 years. Bankruptcy requires you to
completely disclose your financial situation to the bankruptcy court and it
requires you to attend hearings, pay filing fees and usually retain an
attorney. Bankruptcy also must be disclosed on various mortgage, license and
employment applications of which there may not be time limits. Bankruptcy my
cause the cancellation or closing of credit accounts which are not delinquent
because all creditors must be disclosed in the bankruptcy petition. Based on
income and assets you may not be eligible to file a Chapter 7 bankruptcy.
CREDIT COUNSELLORS WORK ON BEHALF OF CREDITORS. While there
is some benefit to help provided by credit counselors there is an inherent
conflict of interest with how credit counseling operates. Credit Counselors
advertise that they can help consumer's lower payments and avoid bankruptcy.
This is usually accomplished by getting a creditor to eliminate or reduce the
interest (i.e. profit) being charged on a particular account, or restructure a
payment plan so that all or a majority of the principal is paid back to the
creditor. This is an effort to maximize the return or recovery to the creditor
and entering into such a program has an immediate effect on credit. There are
various nuances to this type of service which may not be advantageous to the
consumer. For example if your home mortgage and auto loans were not delinquent,
you would not want to restructure them to pay credit cards other unsecured
debt.
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