The Personal Finance Help Center

5 Things You Need to Know About Unsecured Debt

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I’ve been deeply in deep debt before and it’s never fun – that’s actually one of the reasons I started the Personal Finance Help Center. However, as a result of my experiences, I know quite a bit about unsecured debt. Here’s what you need to know if you find yourself in trouble with your creditors:

They Can’t Touch Your IRA

Don’t withdraw money from your IRA, 401K or pension plan to pay off credit card debt. Your creditors cannot legally touch that money unless you withdraw it to pay them off. Remember as well that you’ll pay a 10% early withdrawal penalty and any taxes owed to the IRS if you do take the money out early so you have two reasons not to do it. Even if you are threatened by a creditor with a lawsuit, don’t worry about it – the judge won’t let them touch the money either.

The one exception to the rule however is when you deliberately start dumping lots of cash into your IRA. You can continue to make normal contributions, but suddenly dumping a few thousand dollars into the account when you are facing a mountain of unsecured debt could get you charged with fraud.

credit cards

Don't charge up lots of additional unsecured debt on your credit cards. Doing so could be considered fraud.

Don’t Charge Up Your Credit Cards

Speaking of fraud, while you can discharge your debts in bankruptcy court, if you were to suddenly charge several thousand dollars on your credit cards and then declare bankruptcy, you’d better have a very good explanation for the judge as to why it happened.

It’s legitimate for example that you charged up all that money when someone was in the hospital after a major illness or an accident. It’s not legitimate when you charged up those thousands of dollars because you took a trip to Paris on the credit card’s dime when you knew you couldn’t pay it back. Doing something of that nature could get you thrown into jail for fraud and could get your bankruptcy petition rejected.

Switch Your Bank Account

Calculator -- figuring out unsecured debt

Even when it feels hopeless, remember, there is light at the end of the tunnel. You just have to hold on long enough to see it.

These days, many people arrange for their credit cards, checking and savings accounts and even investment accounts to be held at one bank. While that might be convenient for you, it also means that when you owe a lot in unsecured debt, your bank will have an easier time seizing the money that you owe them. Switch to a different bank and they can’t take the money without a court order and a marshal to help them seize the cash.

Note that I’m not recommending you deliberately hide your assets from the bank. All I’m saying is that if you are in a tight spot anyway, you will need to protect what little you have until you can either come to an agreement with your creditors or you can get to bankruptcy court. By the way, speaking of hiding assets, giving your assets away to relatives or friends won’t help – doing so could be grounds for a bankruptcy to be withdrawn and you could even be charged with fraud.

Talk to Your Creditors

Speaking of making an arrangement with creditors though, do be sure to keep in touch with your creditors and explain to them that you are having a tough time right now. They aren’t stupid and they know that this is all unsecured debt which can easily be discharged or charged off in bankruptcy court.

Therefore, if you make a good faith effort to work with them to resolve your problems, they

Justice

If you are being sued over your unsecured debt, make sure to get a lawyer. Otherwise, your situation could get even worse.

may well try to give you a lower interest rate or even accept partial payment as payment in full. So for example, if you owe $5,000, you might be able to pay down just $4,000 and have the account listed as closed and settled (though it will say “closed and settled for less than the full amount owed”). While not ideal, this is still much better than having an open debt or declaring bankruptcy.

Been Sued? Get a Lawyer

Finally, if the banks sue you over your unsecured debt, make sure to get representation. Don’t just leave the notice in a pile of unpaid bills and pretend it isn’t there. Doing so could make matters worse as the bank could tack on lots of extra fees and could even illegally try to seize funds they aren’t entitled to. For example, social security payments cannot be seized for nonpayment of debt, but that won’t stop some unscrupulous debt collectors from trying to do exactly that if they can find a way to get around it.

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