Secured vs. Unsecured Debt

The Difference Between Secured and Unsecured Debt

Understanding the type of debts you have or will have upon getting a loan is important in the event that you become unable to make your payments. There are different consequences for not paying secured debts versus unsecured debts, and bankruptcy court provides different resolutions for each should any financial issues make bankruptcy necessary.

Banks and other lending institutions confer both secured and unsecured loans. A secured loan uses some form of collateral. For example, when you buy a house or a car you are using a secured loan with the property or vehicle as the collateral. This means that if you should cease to meet the terms of the loan, by not making payments or including the loan in certain bankruptcy filings, the lender has the right to collect the secured collateral. This means a foreclosure or repossession. If you are filing for bankruptcy but want to keep property used as collateral in a secured loan, consult with a professional bankruptcy expert on what type of bankruptcy to file and what the terms should be. In most cases this requires you to continue making the payments on your loan.

Unsecured debt does not require any collateral from the borrower and repayment is typically protected by potential damage to credit rating and collection agencies. This form of debt can also be included in bankruptcy filings and upon request from a bankruptcy court, lenders can be made to stop any and all attempts to collect on the debt. There is a process for the lender to dispute the claim of debt as unsecured, but if the petition is denied they cannot collect on that debt.

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