There are many different types of debt available to consumers, and it’s important to understand the distinctions between them. Having a handle on which types of debt you’re dealing with, for instance, can play a big role in determining if filing for bankruptcy is going to be the right course of action for your personal situation — and if so, which type of bankruptcy will best suit your financial needs (e.g., Chapter 7 or Chapter 13).
One of the most important categories of debt to understand is what we call secured debt.
What Is a Secured Debt?
Secured debts are those that are tied to a physical asset. This type of debt is backed by collateral, or an asset put up as surety for the loan.
Generally speaking, because this collateral acts as a type of security, lenders tend to offer better interest rates to debtors, which can make secured debts more appealing to both consumers and lenders. With that said, as a borrower, you may also have to comply with certain stipulations as a consequence of taking out the loan. For instance, homeowners may need to take out a certain insurance policy when they acquire a mortgage loan.
When a borrower defaults or fails to make payments on time, the lender can take the secured asset as payment, through a mechanism such as foreclosure, repossession, or a court order. Broadly speaking, the asset is then typically resold, perhaps in an auction. In some cases, if the amount of the security isn’t enough to cover the debt, the lender may still pursue the debtor to reclaim the rest, an amount which is sometimes known as the deficiency balance.
The two most common examples of secured debts are home loans and auto and title loans. With a home loan — including mortgages, home equity loans, home equity lines of credit, and so on — the property itself is used to secure the debt. If you eventually default on the loan, the lender can take possession of the home through foreclosure. Similarly, with a vehicle loan, the car is used as collateral for the debt. Again, if you become delinquent, the lender can seize the vehicle.
Other common types of secured debts may include bonds, loans for extremely expensive pieces of jewelry and other valuables, and so on.
One way of thinking about it? Broadly speaking, with a secured debt, you don’t fully own the asset until you’ve completed all of the required payments (including any interest). Once you’ve paid off the loan in full, the lender gives up claims to the asset, whatever it may be.
How Are Secured Debts Different Than Unsecured Debts?
In many cases, you’ll hear about secured loans as a counterpoint to another common category of consumer debt — unsecured debts.
In contrast to secured loans, which are backed by a physical asset acting as collateral, you may think of unsecured loans as those that are based largely on your promise to pay them back. Common types of unsecured debts include bank loans, credit card debt, student loans, and medical bills.
Generally speaking, these loans do not require security or collateral backing, and there’s nothing to seize if you fail to make sufficient payments on time. Because these types of debts are considered riskier for lenders, unsecured lines of credit and loans often come with higher interest rates. Similarly, lenders will often take a deep dive into a consumer’s credit history, debt-to-income ratio, and other financial factors, in order to determine if the debtor will qualify for the loan in the first place.
If a debtor falls behind on payments, the lender may pursue various courses of action, such as retaining a third party debt collector, or, eventually, bringing a lawsuit against the consumer. This could ultimately result in the debtor seeing consequences such as wage garnishment, the establishment new liens, or even asset seizure.
Have Any More Questions About Understanding and Managing Debts?
Debt is a fact of life for consumers in America, from business owners, to couples, to retirees. In fact, consumer debt is one of the primary engines that drives our economy. But even with this being said, it can still feel incredibly trying to deal with debt matters on your own. Managing debt is an incredibly personal and private experience — and for many people, finding the answers they need is often far easier said than done.
Do you have any questions about secured or unsecured debts? Struggling financially and looking to understand all of the courses of action available to you, including bankruptcy? Ready to start on the journey to getting the financial relief you deserve?
If you have any further questions or you’re ready to continue the conversation with experienced bankruptcy attorneys in the Chicagoland area, don’t hesitate to get in touch with the Gunderson Law Firm.
Our staff can help connect you with actual, straightforward answers specific to your unique situation. No need to search for all the variables and hope you don’t miss any key detail — just call, and our knowledgeable team can help you get a better handle on your personal circumstances.
At the Gunderson Law Firm, we take all steps possible to protect debtors and their assets immediately, and throughout the bankruptcy process. We can also offer counseling on realistic ways to avoid serious debt issues in the future.
Whether you are a business owner, a wage earner, retired, or otherwise, we can help address your specific situation with strategic plans to help put severe indebtedness behind you so you can enjoy life again. Drop us a line if you want to get the conversation started.