There are two different types of major debt, secured debt and unsecured debt. If you are trying to prioritize debt or thinking about getting a loan, you will need to understand the difference between secured debt versus unsecured debt.
What Are Secured Debts?
Secured debts have an asset attached to them, and this asset is known as collateral. A lender will place a lien on the collateral. And, this lien provides the lender the opportunity to seize the asset if you do not make the required payments on time or fail to make the payments altogether.
After the lender gains ownership of your assets, the lender can sell the assets to pay off the debt that you owe. Furthermore, if the amount gained from the sale does not pay off the debt, the lender can require you to pay the difference.
There is an easy way to understand the difference between secured debt versus unsecured debt. Two examples of secured debt are mortgages and vehicle finance loans. The property secures the mortgage on your home. Your vehicle secures the vehicle loan. If you fail to make payments on time, the lender has every right to repossess or foreclose on the collateral.
What Are Unsecured Debts?
When you have unsecured debt with a lender, the lender cannot legally repossess any assets if your payments are late. However, the lender can use other types of action against you.
One way that the lender may attempt to receive payment is by using a collection agency. Furthermore, if the lender is not able to receive payment by this method, the lender may take legal action against you. As a result, the court may decide to garnish your income or place a lien on other assets you may have. Consequently, the delinquent debt may also be recorded on your credit history and affect your credit score.
The most common unsecured debt examples are:
- Credit card debts
- Payday loans
- Student loans
- Child support (court ordered)
- Medical bills
Once you know the difference between secured versus unsecured debt, you will be able to organize your financial obligations better. And, always remember to make the minimum payments for all debts you have.
So, if you are considering filing for bankruptcy, speak with an attorney at Douglas Jacobson Law Firm.