There are different ways of addressing overwhelming unsecured debt that you cannot get a handle on. One method to protect yourself from creditors is by filing for bankruptcy. You also have the option of ignoring all of those "past due" notices that you receive. As far as your credit is concerned, records of unsecured debt, such as unpaid credit card balances, fall off of your credit history much sooner than does a bankruptcy item. However, if you fail to pay unsecured debt, this could end up costing you in court if your creditors file suit against you.
About Bankruptcy
When filing for bankruptcy, certain types of debts are discharged, releasing you from liability and prohibiting your creditors from taking action against you in a court of law to recover the debt. Nor can they attempt to collect the debt by sending you letters or calling you on the phone. Those filing under Chapter 7 (liquidation) or "straight" bankruptcy can walk out of the courtroom with all of unsecured debt erased forever, if they meet certain eligibility criteria. Those filing under Chapter 13 also have the same protections against creditor harassment and litigation; however, debtors are required to engage in a three- to five-year repayment program to creditors, during which time they pay money to a court-appointed trustee who uses it to pay the debts.
When You Don't Pay
The prevailing myth about an unpaid debt that gets sent to collections is that paying it off increases your credit score. Not necessarily so, say Credit.com financial advisers, who indicate if your credit score improves, this will be nominal. A record of unsecured debt that gets sent to collections remains on your credit report for seven years past the last 180-day late payment on the debt. "Harassment" from a third-party collections company that purchases the debt from the original creditor is part and parcel when you don't pay your debt. But your creditors can also take it up a notch and file suit against you in a court of law to recover the monetary amount of the debt.
Civil Litigation
Depending on the laws in your state, your creditors may opt to file a lawsuit against you to recover unpaid, unsecured debt. One of the more unpleasant results of a lawsuit, should your creditor get a judgment in its favor, is wage garnishment, which occurs when the court issues an order that allows a certain amount of money to be withheld from your paycheck to pay back the debt. The creditor may choose another method of repayment, such as filing a lien against your real property or by levy (attachment), which freezes the assets in your bank accounts. The method of collection a creditor chooses depends on what your state's laws permit, points out Credit.com financial advisers. Additionally, a judgment can remain on your credit report for seven years, and longer, if it goes unpaid. Some states permit a judgment to be renewed more than once, meaning that your obligation to pay the debt is permanent until it is satisfied.
Bankruptcy Basics
Certain life events--divorce, loss of employment and a serious medical illness--can make it impossible to repay debt. In some cases, MSN Money says, bankruptcy is the better option. Depending on your financial status and the laws in your state, you may be able to file for Chapter 7 or Chapter 13 bankruptcy. Chapter 7 or "straight" bankruptcy wipes out unsecured debts, such as credit card balances and medical debt--but not student loans and recent taxes. MSN Money cautions some of your property may be liquidated to satisfy your debts. Chapter 13 bankruptcy allows you to keep property that would otherwise be taken and sold to pay your debts. However, you must agree to repay some of the debt during the course of three to five years. Chapter 7 bankruptcy may be the most desirable legal option to wipe out unsecured debt; however, there are "means tests" in place established under state law that make sure debtors don't use Chapter 7 to avoid debts that they simply don't want to pay--as opposed to those that they cannot repay.
Which Is Best for You?
Pre-filing counseling is a legal requirement for everyone who files for bankruptcy, says the National Foundation for Credit Counseling. During counseling, debtors are informed of the consequences of bankruptcy. Additionally, other options for paying unsecured debt are laid out. The NFCC stresses bankruptcy is a very serious decision, as it leaves a black mark on your credit report for 10 years. Before you make a decision about how to cope with unsecured debt, schedule an appointment at a credit counseling agency that's a member of the NFCC so a professional credit financial adviser can help you manage your debt in a way that's within your financial means.
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