There are two types of consumer debt: secured debt and unsecured debt. Secured debt reduces the risk level for lenders, who hold an asset assigned by the borrower as collateral until the debt is paid off. Unsecured debts, on the other hand, are funds issued by lenders who take no collateral in return.
Secured debt is debt that is secured by assets. In other words, if you fail to pay a secured debt, the creditor will be able to initiate proceedings to seize the property that you have pledged against the loan.
Bank loans, car loans and certain cards and lines of credit can all be secured, but the best example is a residential mortgage. Your mortgage is guaranteed against the value of your home. If you are unable to make your mortgage payments, your mortgage lender has the legal right to repossess your property in order to recover the amounts owed to them.
Unsecured debt arises from credit granted without any collateral. Instead, the lender grants credit to a borrower based solely on his creditworthiness and his promise to repay.
Credit card debt is by far the most common type of unsecured debt. If you are unable to make your credit card payments, the card issuer cannot take back the items you have purchased. But he can call on a debt collector to confront you, ask a court to garnish your salary, and report the payment incident to credit bureaus, who will not welcome your inability to – or refuse to – pay your debts.
How Are Different Types of Debts Affected by Bankruptcy?
With few exceptions – such as student loans, support payments, and court fines – unsecured debts are eliminated in bankruptcy. You will no longer have to repay credit card balances, unsecured loans and lines of credit, unpaid utility bills and more.
In contrast, secured debts are not included in bankruptcy. For example, you will not be released from the debt you have on your mortgage, assuming you have little or no assets in your home. This means that you can continue to make mortgage payments (which should be easier now that your unsecured debts have been eliminated), allowing you to keep your home.
What must I do now?
If you are having trouble managing your debt situation – whether or not your debts are guaranteed – it is time to speak to an authorized insolvency trustee, who will explain your options and guide you step by step through the debt relief process.