Potential bankruptcy filers often ask me what is the difference between secured and unsecured debt.
“Secured” debt is backed by collateral. The collateral “secures” your obligation to repay the debt. If you fail to pay, the secured lender can take the collateral from you and sell it to collect the debt.
If the collateral has a value that is greater than the amount you owe, the lender is generally obligated to return the excess to you.
If the collateral value is less than the amount you owe, the lender has a “deficiency claim” that it may seek to collect from you. To collect the deficiency claim, the lender files a lawsuit against you to get a judgment that it can enforce through judicial process.
Examples of secured claims include mortgages, car loans, and loans secured by household goods. If you owe a bank on a loan and maintain a checking or savings account at the same bank, the bank is generally “secured” to the extent of the balance in the account.
An “unsecured” debt is not secured or backed by collateral. If you fail to pay, the lender has no recourse against any specific asset of yours and the lender to collect must file a lawsuit against you, similar to the effort to collect a deficiency claim.
Examples of unsecured claims include credit card debt, legal and medical bills, loans from friends and family and store and gasoline charge cards.
Now you know the fundamental distinction between secured and unsecured debt.
If you are overwhelmed by debt, whether secured or unsecured, and would like to get a sense of your various options, contact us at your convenience for a free consultation. We can usually sketch out the alternatives in 30 minutes or less, but we don’t set a timer and stop when an imaginary buzzer goes off.
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