Monday, June 2, 2014

Don't Feel So Secure Because Your Loan is Unsecured

If you're one of those people that might soon default on loans, but sleeps well at night because they're all unsecured, then it's time to wake up.

It's not easy for lenders to recover all or a part of their money if a loan is unsecured, but it's by no means impossible, and arriving at some kind of settlement is normally best for both parties.

Let's take a look at the differences between secured and unsecured loans, because there are many misconceptions that surround this issue.

Secured Debt

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Secured Debt means that there is some property i.e. collateral, that the debtor has pledged to secure payment of the loan, and the collateral can be anything of value but normally needs to have a value that is higher than the amount of the loan that's being applied for.

If a borrower defaults on a secured loan, then the lender will normally seek quick court permission to get its collateral prior to judgment.

The procedure is called a 'replevin' and it can be used so long as the collateral isn't real estate.

The debtor then has the right to respond to the creditor's lawsuit, and is normally allowed twenty days, and if a legitimate defense is raised then the right to a trial exists.

If the lender wins the case then he can seize certain (execute upon) debtor's assets.

In most States the creditor is forbidden from seizing;

All but very expensive clothes, non-valuable home furnishings, certain equity in the home, equity in most cars.

Unsecured Debt

Unsecured Debt means there is no property pledged to secure payment, and credit card debt is a good example of that.

Since an unsecured debt is obviously more difficult to collect, it is most often handed over to a collection agency.

However, when collecting a consumer debt such as a loan for home or personal use, the collection agency or attorney must follow set rules that include disclosure requirements and harassment prohibitions, and if the collector violates these rules he will be obliged to pay the debtor damages.

A collection agency generally asks for between 30 and 50% of the debt, so if a considerable amount is owing then the creditor will often use an attorney instead, because it should work out cheaper.

When a loan is in default, which more than likely means than payments were not made on time or as otherwise agreed, then the lender will normally begin the collection process by sending the borrower a default notice.

It's important that you respond, because if you don't then you'll be in default and a judgment will be handed down, after which the creditor with whom you have the unsecured loan will be entitled to verify your assets.

It is quite common for both parties to come to an agreement at this point, because the debtor doesn't want his assets seized, and banks are in the business of lending money and not selling jewelry or used furniture.

If the debtor is owed money by a third party, such as an employer or bank, then the third party can be forced to pay the creditor instead of the debtor, through a process called garnishment and levy.

Most States will only permit creditors to confiscate up to one quarter of a debtor's wages, and Texas prohibits the seizure of wages.

Whereas foreclosure proceedings can take a considerable amount of time, it is normally a whole lot easier to recover merchandise that was bought and not completely paid for, but this can only be done however if the "peace is not breached". This means that a confrontation must be avoided, and if the peace is breached, then the debtor can sue the lender or its agents.

A creditor can avoid breach of peace risk by having the Sheriff do the repossession, but because it's expensive it not often employed.

To Summarize

You can be forced to make good on an unsecured loan.

The chances of the lender taking action increase according to the size of the debt, and the amount of non-exempt assets that the debtor has.

The creditor will prefer making a deal to going to court, and coming to some sort or arrangement would most likely be in your best interests too.

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