What is the difference between unsecured and secured debt?

What is the difference between unsecured and secured debt?

| Oct 8, 2020 | Uncategorized |

When Florida residents are considering their debt relief options, it is important to understand the different categories of debt they have and how this will affect their ability to discharge their debt through personal bankruptcy. Debts can be of two main types: secured and unsecured. The basic difference between the two is collateral.

Unsecured Debt

Unsecured debt does not have collateral backing. This means its requires no security; it is given on the borrowing party’s credit worthiness and guarantee to pay. For example, qualifying for personal loans requires meeting strict criteria, but when a borrower does, they are able to get great personal loans. This means these loans are only given to only the most credible borrowers.  This is also why these types of debts generally have a high interest rate.

Most common types of debts fall under unsecured debts. Medical bills, credit card bills and gym membership are all unsecured debts. Since they are issued only on the credibility of the borrower, the risk to the lending company is high and this translates into high interest rates.

Secured Debt

When a borrower puts up security or collateral for the loan, it is called a secured debt. This means if the borrower defaults on their loan, the lending company can use the asset to get back its funds. For example, in an auto loan the automobile becomes the collateral for the loan and in case of a default, the lending company gets ownership of the loan. Similarly, in case of a mortgage, the lending company has an equity in the property until the mortgage is paid off in full and can seize it if payments are not made.

Whether in the form of credit card bills or mortgage payments, debts can creep up on hardworking people and make it difficult for them to keep going. In these instances, personal bankruptcy may be one of the options to use for debt relief. To understand what debts can be discharged and what cannot, it might be helpful to speak to an experienced attorney.