If you’re facing a rising tide of debt, and trying to determine the best strategy to help get yourself back on solid financial footing, one of the most important steps you can take is to determine what type of debts you have. In most cases, debts tend to fall into one of two categories: secured and unsecured.
While it may sound simple, determining if your problem debts are secured or unsecured is truly a crucial step forward.
Determining what types of debt you’re dealing with can guide your strategy for relief; understanding this distinction is key to understanding which of your debts you can automatically discharge in bankruptcy, and deciding which type of bankruptcy may ultimately work better when it comes to helping you protect your most important assets.
So, what do you need to know about these two major categories of debt? Let’s break down the distinctions between secured and unsecured debts:
A secured debt is a debt that is connected to a physical asset. It is a loan that was granted in exchange for offering up a piece of property as collateral. So, if you do not pay the debt, your creditor has the right to foreclose, repossess, or otherwise take the property in exchange, as a form of payment.
Common types of secured debt are home mortgages and auto and title loans. Mortgage loans are secured by real estate; auto and title loans are secured by the vehicle itself. If you ever become delinquent or default on these loans, your lender can claim the property, be it your home or your car. Other common types of secured debts may include bonds, loans for extremely expensive pieces of jewelry and other valuables, and so on.
A few more things to keep in mind? Secured loans may come with slightly lower interest rates for borrowers, because they are typically less risky for the lender. However, it could be argued that you do not truly own the asset connected to the debt, until the loan is fully paid off. You may also have to face and comply with certain stipulations as consequence of the loan, such as purchasing insurance for an automobile.
In contrast to secured debts, unsecured debts have no collateral backing. This type of loan does not require security, and, as a result, your creditors cannot automatically take any of your assets as payment in the event of delinquency or default.
In essence, unsecured debts are based purely on your promise to pay them back, usually with interest. Other factors, such as your past credit history, can also influence whether you qualify for these lines of credit, and what you may have to pay over time.
Credit card payments and many bank loans fall into the category of unsecured debt, as do medical bills, some retail store loans, payday loans, and so on.
Should you fall behind on payments or default on an unsecured debt, the lender has several courses of action available to pursue you, and ultimately force you to pay down what you owe. This includes hiring a third party debt collector, or filing a lawsuit, which could ultimately result in a judgment against you leading to garnishment of wages, liens on your personal assets, or some other financial consequence.
In many cases, because unsecured loans are backed only by the reliability and credit of the lender and the borrower’s promise to pay, interest rates associated with unsecured lines of credit and loans are often higher; not every consumer will necessarily qualify for them, as well, and your credit score and debt-to-income ratio may be factors in whether you can attain the loan in the first place.
Understanding – and Managing – Your Debts
In Illinois bankruptcy law, one of the most important things to understand is which of your debts are dischargeable, and which are not. Understanding the distinction between secured and unsecured debts is a key step.
Certain debts, such as secured loans, child support obligations, student loans, and a few others, cannot by discharged automatically. However, they can often be restructured, making them less of an immediate burden. And with that said, there are often many debts that can be quickly discharged — such as unsecured credit card debts, medical bills, and others.
When handled well, bankruptcy may help relieve people or companies of some of their most pressing debts and restructure others, so that they may once again function in society and participate in the economy. The hope is that a person who has filed for bankruptcy will be able to breathe for a moment, then move forward, with a much more manageable financial situation.
Ultimately, bankruptcy is about helping people attain the financial relief that they not only need, but genuinely deserve. At the Gunderson Law Firm, our attorneys and staff take every step possible to protect our clients’ assets to the full extent allowed by today’s laws throughout the complex bankruptcy process. If you have any questions or concerns, or you’d like to discuss all of your options for dealing with severe indebtedness, don’t hesitate to drop us a line today to set up your free consultation.