The Important Distinction Between Secured and Unsecured Debt
Transcript:
Hi, Matt MacArthur, bankruptcy attorney at Clear Counsel Law Group. A common misunderstanding, or confusion that I come across on a daily basis with my clients, is understanding the difference between an unsecured debt and a secured debt.
In fact, one of the bankruptcy forums that's typically filled out will ask the question, "Have you paid any unsecured credits more than $600 in the last 90 days?"
Many of my clients simply don't know how to answer this question, because they don't know what an unsecured creditor is. I'd like to take a moment to clarify what each of these means, and help you understand the difference.
What is an Unsecured Debt?
An unsecured debt is something like a credit card debt, a medical debt, a payday loan. These are very common examples of unsecured debts.
We say that they're unsecured because there's no collateral attached to the debt. In other words, if you don't pay the debt, the creditor cannot come and take anything away from you, because there's nothing securing what's owed. It might be a little bit easier to understand what an unsecured debt is by talking about what a secured debt is.
What is a Secured Debt?
The two most common types of secured debts, or loans, are mortgages and car loans. When a person purchases a home, they take out a mortgage on the home, and they owe the bank, or the mortgage company, a certain number of dollars.
The bank is taking a big risk by lending this huge amount of money to this person to buy a very large asset. What the bank does is in exchange for them agreeing to allow you to have all this money to purchase the home, you agree as the purchaser to give the bank a security in your home.
In other words, if you fail to make payments on the house loan, then the bank has the right to exercise their security by conducting a foreclosure sale and trying to get some of their money that's been lost back through the sale of the home.
This helps them hedge against their bet on you as a borrower, and makes them feel a little bit more secure. It makes it easier to obtain these types of loans.
Why Banks Provide Secured Loans
It's really a good thing for most people, because it gives more people the opportunity to get a home loan, and it also provides security for the bank.
Now, a car loan is another great example of what a secured debt is. If you purchase a car, the car lender inevitably is going to make you sign a security agreement that says that if you fail to make payments on your car loan, that the car company will be able to repossess the car if you fail to make those payments.
Then they'll sell the car at an auction. Recoup some of their losses. In that way, they are a secured creditor.
How Can You Tell if a Debt is Secured?
The easiest way to think about the difference between a secured creditor and an unsecured creditor is if I don't make payments on this debt, is there anything that I would expect the creditor to come and take away from me?
Sometimes, you aren't going to know if a particular debt is secured or unsecured, simply because security agreements can sometimes be found in the small print of contract documents that people don't pay too much attention to when they're trying to purchase an item.
However, if you have any questions about whether a secured debt is secured or unsecured, the easiest way to tell is by looking at the original contract documents.
For something like that, you'd probably would like the help of an attorney.
I would be more than happy to help you in this process of determining what's an unsecured debt and what's a secured debt.
How the difference between these types of debt will affect the outcome in your particular bankruptcy.
Again, my name's Matt MacArthur, bankruptcy attorney at Clear Counsel Law Group.
Please come and see me, and I hope to hear from you soon on your path back to a fresh start.
Take care.
