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Affiliated Attorneys, LLC Blog

Friday, April 26, 2019

What is the Difference Between Secured and Unsecured Debt?

Generally speaking, there are two types of debt: secured and unsecured. Unsecured debt is not backed by an underlying asset while secured debt is directly connected to some property. Most unsecured debt is entirely dischargeable in bankruptcy, but there are a few exceptions. Secured debt is treated differently in bankruptcy because of its connection to an asset.

Unsecured Debt: The Basics

Unsecured debt is a higher risk for the lender, so it is often associated with higher interest rates. Typical examples of unsecured debt include:

  • Medical bills
  • Credit card debt
  • Utility bills
  • Revolving credit limits

Although you may have used your credit card to buy property, that does not make it secured debt. Instead, you must have specifically pled the property that you purchased as collateral for it to be secured debt.

An Overview of Secured Debt

The most common types of secured debt for consumers are for their homes and vehicles. However, you can also have secured debt for other types of transactions or purchases as well.

There are two pieces to every secured debt transactions. The first is the actual debt. In a mortgage situation, for example, that obligation is referred to as a “promissory note.” In that document, you promise to pay a certain amount of money over a specified period. The second document sets up on the lien on your property. In a real estate transaction, this is the portion that is actually referred to as the “mortgage,” even though the two documents are commonly referenced as a package.

These two pieces of the secured debt are essential. The debt cannot be adequately secured without one or the other.

Collection of Secured and Unsecured Debts

Creditors like to have secured debt because if you do not fulfill your obligations as promised, then they can repossess or take the asset upon which the lien is placed. That means that they can take your vehicle or foreclose on your house, for example. Then, they can sell that asset and apply the proceeds of the sale to the debt that you owe them. If you still owe them money after the sale of the asset, then the remaining obligation is considered unsecured debt.

Collecting an unsecured debt is harder for creditors. They can send you collection letters and call you, but there is no asset to take from you to satisfy the debt that you owe them. They will also report harmful things to the credit reporting agencies and may file a lawsuit against you. Once they get a judgment in court, a creditor’s rights to collect increase a great deal. For example, once they have a judgment, they may be able to garnish your wages or bank account to reach the money that you owe them.

Knowing the Difference Between Your Debts Is Important

Knowing whether your debt is secured or unsecured is also essential if you are considering filing bankruptcy. The type of debt you will have dictates what kind of bankruptcy you should file and how your debts will be treated in bankruptcy.

 


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Serving Southeastern Wisconsin, with offices in Milwaukee and West Bend, Affliated Attorneys, LLC represent clients throughout Milwaukee County, Washington County, Waukesha County, Dodge County, Ozaukee County, Racine County, Sheboygan County, Jefferson County, Fond du Lac County and Walworth County.



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