Personal Debt

Secured v. Unsecured Debt: What’s the Difference?

October 27, 2020 / by Joey Gartner, J.D. / 3 min read

When you sit down to pay your bills, you’re probably not thinking about the difference between secured and unsecured debt. But, the two types of debt differ in some very important ways. For instance, the consequences are different if you don't pay. And, they're treated differently in bankruptcy. So, it’s to your advantage to understand the differences and how those differences can affect you.

Two Types of Consumer Debt

Secured Debt

Secured debt is debt with collateral. You may also hear collateral referred to as “security.” In simple terms, a loan is secured when you have pledged property to give the lender protection if you don’t repay the debt. One of the most common types of secured debt is an automobile loan. When you buy a vehicle on credit, the title is typically issued with the lender listed as a lien holder. When there’s a lien on your title, you can’t sell the vehicle without first settling your debt with the lender. 

By contract, the lender also typically retains the right to take back the property if you default on your loan. The process required to repossess a vehicle or other property that serves as security for a loan differs from state to state. In some states and under some contracts, a lender can legally repossess your property if your payment is even one day late. Of course, they usually don’t act that quickly. But, practices differ from lender to lender.

Many people prioritize debts secured by property they want to keep, such as their homes and cars. But, that’s not always the right move. For example, some people who fear automobile repossession pay a lot more than the vehicle is worth to keep it. Meanwhile, other accounts fall further behind.

Collecting on Secured Debt

Secured debt can also be more difficult to settle than unsecured debt. While an unsecured debt might be passed to a collection agency or sold to a debt buyer who will accept partial payment, the lender’s ability to reclaim the property makes settlement of secured debts less desirable. The “something is better than nothing” outlook many debt collectors adopt doesn’t apply when the lender can recoup a significant amount of the unpaid debt by taking back the property and selling it.

If the property is repossessed, that doesn’t necessarily put an end to the debt. If the sale of the property doesn’t bring in enough to cover the debt, the borrower is typically still responsible for the remaining balance. However, the debt is no longer secured. So, the creditor’s collection options are limited to the same type of efforts any unsecured lender might use.

Unsecured Debt

Unsecured debt is any debt that doesn’t fall within the description above. That is, any debt that does not give the lender a security interest in some type of property. Some of the most common types of unsecured debt include medical debt, credit card debt, and payday loans.

Unsecured debt also takes in a wide range of unpaid bills you might typically not think of as debt, such as: 
  • old utility bills
  • unpaid rent
  • student loans
  • telephone bills
  • many types of taxes

Collecting on Unsecured Debt

Because these debts are unsecured, there is no piece of property that the lender can directly reclaim to pay some or all of the debt. But, that doesn’t mean unsecured debt is risk free. Unpaid unsecured debt may be turned over to collection agencies, sold to debt buyers, or pursued directly by the original creditor. If you’re sued for unpaid unsecured debt and the creditor or debt buyer gets a judgment, they may be able to garnish your wages or attach other property to pay the debt.

There may also be direct consequences. For instance, those in default on student loans are generally ineligible for additional funds, and will likely see their tax refunds seized. Unpaid utility bills may prevent a person from securing new service.

Making Smart Decisions About Debt

Prioritization of debts involves more than just considering whether or not a debt is secured and whether you want to keep the property. But, most people don't think about all of the factors to be considered. That can lead to costly mistakes. At DebtCleanse, we know the power of accurate information. So, we make sure members can check in regularly with their attorneys. The DebtCleanse personal membership fee includes unlimited sessions with an attorney, who can help assess your situation and advise you. The attorney will also review your accounts for possible violations of consumer protection statutes. Pursuing claims under those statutes may give you leverage to negotiate your debts, or even put money in your pocket. Call us at 800-500-0908 to learn more.

 
Joey Gartner, J.D.

Joey is dedicated to our mission of helping America break free of debt. He leads the DebtCleanse Member Advocates who serve as the go-to contact for members, connecting them with an attorney, gathering important documents and more. He is also an attorney licensed to practice law in Illinois.


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