What is the Difference Between Unsecured and Secured Debt?
A secured debt is a debt in which the creditor maintains a security interest in an item or piece of personal property such as a house or an automobile.
With secured debts, if you fall behind on payments, the lender can repossess the property that originally secured the debt.
An additional drawback to secured debt is the fact that you may remain liable for the deficiency balance owing on the debt after your property has been repossessed and sold.
However, the laws regarding home mortgages vary from state to state.
This means that a lender's debt recovery rights will depend on the terms of your mortgage and whether any other lenders also have an interest in the property.
Unsecured debt is debt in which you borrow from a creditor to obtain goods or services on credit in exchange for your promise to repay the debt.
The primary difference between secured and unsecured debt is that unsecured debt is not collateralized by personal property.
Unsecured debt is commonly given in the form of credit card debt, commercial debt, medical debt, and personal loans.
If you fall behind on an unsecured debt, lenders can take legal action against you, but more commonly will try to work out a reasonable debt settlement.
It is possible for a secured debt to become an unsecured debt when the property that is securing the loan has already been repossessed and sold by the creditor.
Traditionally, if the sale of the property does not cover the full amount of the debt, it will result in a deficiency balance which is still the responsibility of the consumer.
This deficiency balance is now considered an unsecured debt because no property is securing it.
In many cases, this balance can be successfully resolved through a debt settlement program.