Secured vs. Unsecured Debt

Find out the legal difference between secured and unsecured debts, and learn what happens to each if you file for bankruptcy.

If you are thinking about filing for Chapter 7 or Chapter 13 bankruptcy, it is important to examine all of your debts and figure out if they are secured or unsecured. Each type of debt is treated differently depending on whether you file for Chapter 7 or Chapter 13 bankrutpcy.

Not all debts are discharged just because you filed for bankruptcy. Frequently, whether a debt is discharged in Chapter 7 bankruptcy or how it is treated in your Chapter 13 repayment plan depends on whether the debt is secured or unsecured.

Secured Debts

Secured debts are debts that are linked to some type of property that you own (called the "collateral"). If you default on the loan, the creditor can take the property. There are two types of secured debts -- those which you agree to, and those which you don't.

Secured Loans With Your Consent

The first type, secured loans that you agree to, include:

  • mortgages and home equity loans (your house serves as collateral in the event you default) (learn about your options for mortgages and home loans in Mortgage Debt and Other Home Loans in Bankruptcy)
  • auto loans (get detailed information on how car loans are treated in bankruptcy in Your Car in Bankruptcy)
  • store charges with a security agreement -- for example furniture purchases when you pledge the sofa or dining room set as security for the loan (although most purchases like this are unsecured), and
  • personal loans from finance companies -- when you pledge personal property (such as household goods or your car) in order to get a loan.

Nonconsensual Liens

The second type -- when you don't pledge property as security for the loan -- are called nonconsensual liens. Here are some examples:

  • money judgements against you -- a creditor obtains a money judgement against you and then records a lien against your property in the amount of the judgment
  • liens created by law -- sometimes the law allows liens to be recorded against your property in the absense of a judgment. Examples include mechanic's liens (a contractor or subcontractor can record a lien against your home if it doesn't get paid) and homeowner's association liens (if, for example, you don't pay your dues), and
  • tax liens -- federal, state, and local governments can record a lien against your property if you owe delinquent taxes.

Unsecured Debts

Unsecured debts are not secured by your property. If you default, the creditor cannot take anything of yours without first obtaining a money judgment against you in court.

Common examples of unsecured debts include credit cards, student loans, medical bills, lawyer fees, rent and utility payments, and health club memberships.

Beware of Security Agreements in Credit Card Contracts

Although credit card debt is generally unsecured, it might be secured if you signed a security agreement when you got the card. Always read the terms and conditions carefully when you sign up for a new credit card, or when you agree to any loan.

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