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The Difference Between Secured Debt and Unsecured Debt

There are two types of debt for consumers. There is secured debt, which is a loan that is backed up by some other property as collateral. Unsecured debt is not secured by specific collateral. It is important that consumers understand the differences between the two types of debt and how they matter in bankruptcy.

If you are having trouble making loan payments, creditors have different rights when collecting money and they have different priorities in bankruptcy proceedings. Bankruptcy falls under federal law, but your property may be treated differently depending on the state where you file. If you have questions about types of debt in bankruptcy, talk to a bankruptcy lawyer in your area for legal advice.

What Is Secured Debt?

Secured debt is a loan backed up by collateral. Collateral means it is a specific asset or piece of property that the lender can claim if you can’t pay back the loan.

One of the most common examples of secured debt is a mortgage. A home loan to buy a property is generally secured with the home that the loan is used to purchase. So if you’re having trouble making your mortgage payments and default on the loan, the lender can foreclose on the property to satisfy the debt.

Typically, lenders offer secured loans at lower interest rates and better terms than unsecured loans because of the added protection the collateral provides the lender. Auto loans are another common type of secured debt, where the loan is backed up by the vehicle.

What Is Unsecured Debt?

Unsecured debt doesn’t have any specific collateral. For example, credit cards usually involve unsecured debt. If you stop making payments on your credit card, the credit card lender can sue you for repayment, but they may not have a right to any specific piece of property. In a lawsuit, a judge could order you to sell property to satisfy debts, but the unsecured lender can’t seize the property directly.

Unsecured debt generally comes with a higher interest rate. Some borrowers can’t get unsecured credit if the card issuer doesn’t think they are a good credit risk. Unsecured personal loans, credit limits, and lines of credit without collateral are generally based on the applicant’s credit report and credit score.

Bankruptcy Rights of Different Kinds of Creditors

Borrowers generally must repay all their debts, both secured and unsecured. However, if you are having personal finance problems, you may not be able to make all your monthly payments. In some cases, you may decide to file for bankruptcy to get debt relief.

In bankruptcy proceedings, secured creditors still have the right to the collateral guaranteed by their loans.

However, unsecured debts have a lower priority in bankruptcy and can be discharged at the end of Chapter 7 bankruptcy proceedings.

For example, if you are a homeowner and take out a second mortgage on your home, the original mortgage loan takes priority over the second mortgage. It is only after both loans have been fully satisfied that unsecured lenders are entitled to any proceeds from the sale of the property or home.

Let a Bankruptcy Lawyer Help You

Loan obligations, including student loans, car loans, medical bills, and credit cards, can quickly become overwhelming. It is important to understand your creditors’ right to recover payments and property and the creditors’ priority.

If you have questions about what happens when the borrower defaults on a debt or think you might want to file for bankruptcy, get more information from an experienced bankruptcy lawyer. Your lawyer will be able to clarify what assets — including assets like your home and your car — you may be able to protect during the bankruptcy process.

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