The Differences Between Secured Debt and Unsecured Debt
There are two types of consumer debt: secured debt and unsecured debt. Secured debt reduces the risk to lenders, who hold an asset given up by the borrower as collateral until the debt is repaid. In contrast, unsecured debts are funds issued by lenders who take no collateral in return.
Secured debt is guaranteed by its collateral. In other words, if you fail to pay a secured debt, the creditor will be able to commence proceedings to seize the security you pledged against the loan.
Bank loans, car loans, and certain credit cards and lines of credit can all be secured, but the best example is a residential mortgage. Your mortgage loan is secured against the value of your home. If you fail to make mortgage payments, your mortgage lender has a legal right to foreclose or repossess your property in order to recoup the credit they extended to you.
Unsecured debt results from credit extended without any collateral. Instead, a lender provides credit to a borrower based solely on their creditworthiness and promise to repay.
Credit card debt is by far the most common type of unsecured debt. If you fail to make credit card payments, the card issuer cannot repossess the items you purchased. But they can hire a debt collector to confront you, request a court to garnish your wages, and report your delinquency to credit bureaus—who will take a dim view of your inability (or unwillingness) to pay your debts.
How Are Different Debts Affected by Bankruptcy?
With a few exceptions—such as student loans, support payments, and court fines—unsecured debts are eliminated by bankruptcy. You will no longer have to repay credit card balances, unsecured loans and lines of credit, unpaid utility bills, and more.
In contrast, secured debts are not included in a bankruptcy. For instance, you will not be relieved of the debt you owe on your mortgage, assuming you have little or no equity in your house. That means you can continue to make mortgage payments (which should be easier now that your unsecured debts have been eliminated) and you get to keep your home.
What Do I Do Next?
If you're struggling to manage your debt—secured and unsecured—it's time to talk to a Licensed Insolvency Trustee, who can explain your options and guide you through the debt relief process step by step.