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Today’s post comes from fellow S&S reader, Trish. Don’t risk losing your belongings because of unpaid debt. Use these tips when things get bad.

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How to Avoid Losing Your Collateral Due to Unpaid Debts

What happens when you can’t pay back your debts?

Well, if your debts are tied to collateral, your possessions can actually be sold off to pay back as much of your debts as possible. Don’t make your car payments? The bank will repossess your car. Fail to pay your mortgage? They can foreclose on your house!

Yeah, this is a serious situation. If you find yourself missing payments, you need to act quickly-but-calmly, to avoid losing your collateral.
 

 

Know how much time you have

The day you realize you can’t make a payment, contact your creditors to explain why you’re missing a payment and see if you can work out a payment plan you’ll be able to stick to.

You should also find out at this point how much time you have before the lender will take action on the collateral. Knowing how much time you have will allow you to make a plan to get back on track with your payments. You might need to cut expenses so you can send more money to the lender. Or you might need to find a second job or a side hustle so you can have more income available to pay back the amount due.
 

 

The final call

If worst comes to worst (you can’t cut your expenses back any further, and you can’t find a way to make more money), you might need to consider filing bankruptcy.

This isn’t a decision to be taken lightly. Filing bankruptcy will negatively impact your credit for years to come. But so will losing your collateral to unpaid debts. Before making any rash decisions, contact a bankruptcy attorney for more information on bankruptcy proceedings, including a comparison of the different types of bankruptcy.

Most individuals filing bankruptcy use either Chapter 7 or Chapter 13 (referring to the applicable section of the US tax code). Chapter 7 typically involves selling as many of your possessions as necessary to pay off all your debts, including debts that don’t have collateral (like credit cards, for example).

Chapter 13 typically involves paying off as much of your debt as you can, then restructuring the rest of the debt with the help of an attorney. The attorney will help you get some extra time, lower payments, and/or longer contracts.

But don’t forget to contact your creditors directly at the first sign of missed payments. You may be able to work out a plan with them to avoid bankruptcy and save your credit score.