What's the difference between secured and unsecured debt?

Secured vs. Unsecured debt

Secured and unsecured debts are obligations or payments you owe a creditor. Secured debt, however, is backed by collateral or an asset which can be recovered or given back to the creditor to repay them if debt payments are not made. Unsecured debts are not backed by collateral.

Consider also, secured debts can be involuntary or voluntary. Common types of voluntary secured debts include your mortgage payments for your home or car. Involuntary secured debts can include property tax obligations or liens.

What if I do not pay my debts?

If you have secured debts and you fail to meet a contractual obligation to make debt payments (i.e. you stop making your mortgage payment) the creditor has the legal right to enforce the contract. Generally, their rights are stated in the contract, but they may also include property repossession, which can include repossessing a car, or foreclosing on your home, which may or may not require a court action. Finally, a secured creditor can also file a lawsuit against you and ask the court for a judgment.

If you fail to make unsecured debt payments, however, it will be more difficult for a creditor to garnish your wages (if allowed by your state) or repossess property. In most cases the creditor may be required to go to court and file a lawsuit against you.

Bankruptcy and debt

Secured and unsecured debts are also treated differently in bankruptcy. Filing bankruptcy does not discharge secured debts. For instance, if you have a home mortgage filing bankruptcy will not discharge the remaining mortgage debt.

Filing bankruptcy will, however, discharge certain unsecured debts. For instance, if you have credit card debts, medical bills and unsecured personal loans this debt may be discharged (in some cases) by filing Chapter 7 bankruptcy.

If you do not qualify for Chapter 7 bankruptcy you also may be able to restructure your debt payments through Chapter 13 bankruptcy and repay your creditors over 3 or 5 years.

What about secured debts? If you file Chapter 7 bankruptcy the bankruptcy trustee may be able to liquidate some of your nonexempt assets and use the proceeds from the sale to repay your secured creditors. If you have a home, in some cases, you can stop a foreclosure, although as mentioned above, the mortgage debts are not discharged.

If you wish to keep your property you can file Chapter 13 bankruptcy and repay your secured creditors through your debt repayment plan. For instance, if you own a home you would like to keep you can restructure your mortgage payments (which are in arrears) and repay the arrearage within 3 or 5 years, assuming you can continue to pay your current mortgage payments.

Are all unsecured debts discharged?

Certain types of unsecured debts are not discharged through Chapter 7 bankruptcy. For instance, if you owe child support or spousal support payments, these are not discharged. Most tax debts and school loans are also not dischargeable. If you have questions about certain types of debts or whether bankruptcy will discharge your debts, talk to a bankruptcy lawyer.