15 Jul What is the Difference between Secured and Unsecured Debt?
Filing for bankruptcy can be a taxing process on a person mentally and emotionally, but it is important to examine and understand the different factors and aspects of your personal debts and assets so that you can better prepare yourself to financially recover. Understanding will help you through the process of recovering financially. One important factor in this is the understanding of the different types of your debts. While there are other important types of differentiations (such as business and non-business debt), we will address the difference between secured and unsecured debt and how they are be affected in the bankruptcy process. This post hopes to elaborate and shed some understanding on the differences between the two.
The main difference between unsecured and secured debts comes in the form of collateral. Secured debts, then, are debts that are “connected” to property that you own. This property is called the collateral. In the case of secured debts, the creditor can take this property or collateral if you default on the loan. This can be either consensual or nonconsensual. Collateral can come in many forms. Consensual loans include collateral such as mortgages and home equity loans, for example. Auto loans and personal loans from companies, though, are also considered in this kind of secured debt. Nonconsensual liens, as they are called, refer to times when property or collateral is not necessarily put forward as security for a loan. This can include, for example, liens created by law. Such cases might include situations where a contractor places a lien against your home or other property when something is not paid. Back taxes owed to governments, whether it be local, state, or federal, can also result in a lien against you and your property. This, however, is still considered a form of secured debt.
Unsecured debt, then, are not secured or backed by property or collateral. That does not mean that you do not owe anything in these cases. Quite the opposite, in fact. It simply means that a creditor cannot collect property or collateral from you without first some form of judgment against you in a court. Most people, whether going through bankruptcy or not, have some form of unsecured debt. It can include debt from credit cards, student loans, or even unpaid utility payments, but it can extend to many other cases as well. Credit card debt, it should be noted, can sometimes be secured debt, but this is only true if you have signed a security agreement in your contract when signing up for the credit card. There are also specific types of unsecured debt that, despite not being backed by property or collateral, receives special recognition over other forms of unsecured debt. This is commonly referred to as a priority claim. Priority claims can include things like child support payments or alimony, but it can also include certain specific tax obligations. The can also be treated differently depending on what chapter you file when filing for bankruptcy.
How your debt is categorized along with what chapter you file for makes a world of a difference in how the debt will be expected to be repaid and the expediency that it is anticipated. This post has tried to explain the basics of the difference between the two, but it is important to investigate your personal assets and debts in detail. Consider speaking to a bankruptcy attorney, if you are not already, or a financial advisor. These trained individuals can help you understand, in much greater detail, the differences between these debts and how you will be expected to handle them during your bankruptcy.