What is the difference between secured and unsecured debt?

I have dwelt this previously but I like to address these issues one more time as they are very important issues while thinking or planning for bankruptcy. After all, I have a tendency to use this lingo with my clients many times and sometimes without explaining to them the difference. Here, I like to give more details on the definition and the distinction between the two terms which has deeper impact on our everyday lives. Now, since I am publishing this in my bankruptcy blog, I hope potential clients would read it and would understand exactly what is meant by these terms. Let us start first with unsecured loan. Let us see any credit card purchases would be consumer loans as they have no collateral. The collateral is your honesty, good will, and the trust which you have built between you and your lender. A car for instance, would be a secured loan if you have financed it. If you are behind couple of months, the auto lender would come after you and more likely that they would repo your car. After all, they are doing it pursuant to the terms of the loan you had signed with them.

Statement of Financing. In many store purchases, you sign the financing documents, where it is filed with the secretary of the state office. This make them secured because these are exempt from being “unsecured” and even if you file bankruptcy, would be considered a secured property and liable to be returned to your lender, or be ready to pay a fair market price.
Let us take a look at unsecured debt. They are debts which have no collateral and are not tangible in nature. Credit cards debts are intangibles in nature. Again payday loans are unsecured and intangible loans. A mortgage loan is a secured loan because the collateral is your home. Most of these unsecured debts can be wiped out in a chapter 7 bankruptcy. As you may know, government fines, child support payments, and some personal injury judgments are exempted from liquidation. Lenders who have secured debts can ask you to return their property and can also sue you for the deficiency. Sometime they have to be reaffirmed, which means that you can keep them as long as you continue to pay them. Okay, let us do a little test here.

Is your credit card a secured or unsecured debt? (Hing: A secured is one which has a collateral)
Is your home a secured debt? (Does it has a collateral?)
If you go to Best Buy, the 52 inch TV is secured or unsecured? (The folks at Best Buy had filed a financing statements and it become a secured transaction?)
How about washer and dryer you bought from Sears’s store? (Whether financing statements filed by Sears or other store, or you purchased through your own credit card)

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3 Comments

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