There are two major types of debt: unsecured and secured. Understanding the difference between the two is critical to both borrowing the money and deciding which debt to pay off first or prioritize over the other. Here’s what you need to know about unsecured and secured debts, and how the type of debt you have will affect your repayment plans.

What is a Secured Debt?

A secured debt is a debt that is tied to an asset. When taking out a secured debt, the debtor pledges an asset, such as their home or piece of property, as collateral for the loan. This provides added security for the creditor whereby, if the debtor fails to pay back the debt, the creditor can take possession of the collateral asset by way of a lien that is placed on the property at the start of the loan.

A good example of a secured debt is a mortgage on a home; since the mortgage is secured for the creditor, the home will be repossessed and foreclosed should the debtor fail to meet their monthly mortgage payments. The creditor will then attempt to sell the house. The proceeds from the ensuing sale of the house ensure that the creditor is paid back for the loan. If the proceeds from the sale do not cover the total amount of the loan, the creditor can require the debtor to pay the difference.

What is an Unsecured Debt?

An unsecured debt is the opposite of secured debt – it is a debt that does not have any piece of collateral attached. Lenders who give out unsecured debts do not have the right to collect the debtor’s property, and can only satisfy the debt against the debtors themselves, as opposed to their property. If a debtor fails to repay an unsecured loan, the creditor can take other measures to ensure the money is paid back, including the use of debt collectors. They can also take the debtor to court and have their wages garnished, or put a lien on the debtor’s property, deterring them from the ability to liquidate assets without repaying the loan. However, in an unsecured debt the creditor does not have the authority to sell off the debtor’s property in the event of non-payment.

Debt Relief with Secured and Unsecured Debt

Usually, secured debt offers lower interest rates than unsecured debt does because of the additional security for the creditor, but the differences between secured and unsecured debt can affect your options for debt relief. If a debtor files for bankruptcy and has a secured debt, such as a mortgage loan, there are options available depending on the circumstances. If payments for the secured debt are up to date, the debtor can choose to surrender the property and walk away from the debt, or keep the property by reaffirming or redeeming the debt. If payments are late by the time the debtor files for bankruptcy, however, the bankruptcy will not prevent the creditor from repossessing the property. In the same circumstance, creditors of an unsecured debt maintain a claim on the debtor’s assets after pledged assets have been transferred to the secured creditors. Therefore, secured creditors have more protection under a debtor’s bankruptcy than unsecured creditors do.

Generally speaking, secured debts and the repayment of such should take priority over unsecured debts. Defaulting on loans, whether secured or unsecured, however, should be avoided at all costs. Understanding the difference between the two and how they can affect your livelihood is key to choosing the best route of debt relief.

In the case of debt settlement and debt consolidation, most companies are much more comfortable with unsecured debt. It’s rare to see a debt relief company that is truly comfortable with assisting individuals with secured debt.

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