What is the Difference Between Secured Debt and Unsecured Debt?
The most straightforward way to understand the difference between unsecured and secured loan is to work out if your creditor can take away any item or property in the case that you are not able to repay the overdue amount in time.
The basic difference between secured and unsecured debts is that in unsecured debts there is no tangible property or any other kind of product that is attached to that debt, whereas for a secured debt there are tangible items that are attached to the debt. Common examples of unsecured debts are arrangements such as credit cards, medical bills and store cards where you do not have to put up any material as security for the debt. On the other hand, things such as mortgages and car payments usually have tangible items attached to it, i.e.: your house or car.
Understanding What Unsecured Debt Is
One of the main reasons Debtors file bankruptcy is to get rid of “Unsecured Debt.” If a Debtor is current on all his secured debt, but has unsecured debt that he cannot pay, he would want to file a Chapter 7 if he qualifies. A Chapter 13 will also help get rid of unsecured debt, but sometimes a Debtor might have to pay a percentage back.
Unsecured debt will encompass credit cards, payday loans, medical bill, repossession deficiencies, foreclosure deficiencies, debts turned over to collection companies, signature loans, and the list goes on and on. When a Debtor decides to file bankruptcy, the main goal is to get a discharge and make all the unsecured debt go away.
Other unsecured debt that might cause a Debtor to file bankruptcy would be to certain lawsuits. If a Debtor gets in a car accident and it is his fault, he might owe money to the insurance company. A Debtor might also be sued by a credit card company. Filing bankruptcy will take care of some lawsuits.
Priority Debt is a sub category of Unsecured Debt
A sub-category of unsecured debt is what is known as a priority debt. A priority debt is own that is not secured by a lien on a piece of property, which makes it an unsecured debt, yet the debt has been defined in the bankruptcy code as one deserving of a high-priority treatment when determining the order in which debts are satisfied in a bankruptcy proceeding.
Priority debts are defined in the bankruptcy code under section 507 (a) as follows:
- Court-ordered domestic support obligations owed to a spouse, former spouse, or child
- Bankruptcy costs related to the filing of the bankruptcy, including fees charged by the attorneys, accountants, trustees, and other court-related personnel
- Claims in an involuntary bankruptcy that arise after the bankruptcy is filed but before the order of the bankruptcy payoff is established
- Wages earned by employees in the 180 days before the filing of the bankruptcy, up to $10,000 per individual
- Amounts owed to employee benefit plans in the 180 days before the filing of the bankruptcy
- Claims of up to $4,000 by those who produce grain or are fishermen
- Security deposits for undelivered property for up to $1,800 per individual
- Certain taxes
- Obligations to maintain the capital of a federal depository institution
- Claims for the death or injury of an individual related to the operation of a motor vehicle or boat when the driver was intoxicated or otherwise impaired by drugs
All claims falling into one of the above categories must be paid before any money can be distributed to those claims falling in the next category on the list. If there are not sufficient funds to satisfy all the claims in one category, the funds are distributed to all creditors in that category equally.
Understanding Secured Debt
The category that most people are familiar with is “Secured Debt.” When a person buys a car or a house, the loan they take out is a secured debt, because it is secured by the property the used the money to purchase. Any debt that is secured by property is a secured debt. Many people will get a loan and use property they already have to secure the debt. Others will have a secured loan on a computer they buy, jewelry, vacuum cleaners, household goods, and the list goes on and on.
The important thing to understand with regards to secured debt and bankruptcy, for the most part, the Debtor either needs to make payments on the secured loan, either directly to the creditor or through the Chapter 13 Plan, or they need to surrender the property and give it back to the Creditor. There are rare occasions when a Debtor has secured property that a Motion to Avoid the Lien can be filed and the Debtor can keep the property free and clear. This does not ever happen with a car or a house.
The difference between the two types of debts is applicable when someone is filing for bankruptcy also. In Chapter 7 Bankruptcy you can make the choice of either keeping the product or property and pay of your debt in some other way. But if you decide that you cannot pay at all then you also have the option of giving the product or property back and paying off your debt in that way. On the other hand, in Chapter 13 Bankruptcy you are allowed to keep the merchandise or property but you will be allowed to pay off your debt according to the Chapter 13 plan. That is to say the bankruptcy court will most probably allow the creditor to charge you only about 10% interest, whereas you most probably were paying a much higher interest than that. However, if the value of the item is less that the value of the debt, then the outstanding about that is not covered by the item will be paid as an unsecured debt without interest.
If you are ready to find out if Bankruptcy can help improve your financial situation, the best place to start is our Free Case Evaluation form. Complete the form below and an attorney near you will call you to discuss your options. Bankruptcy law differs from state to state so it's important that you discuss your case with a local bankruptcy attorney. The form only takes a few minutes to complete, so get started now!