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What is the difference between secured and unsecured debt?

On Behalf of | Nov 15, 2020 | Debt Relief | 0 comments

In these uncertain economic times, with millions of Americans struggling to pay off mortgages, credit card balances or even to put food on the table, finding relief can seem elusive. And Kentuckians are struggling as well.

Fortunately, if you are seeking advice on how to handle debt repayment or whether to file for bankruptcy, experienced counsel in the Louisville area can help you to see the options available based on your personal financial situation.

What is secured debt?

Many people view paying their bills as a task to be completed a couple of times a month, and do not necessarily see the difference between a mortgage or car payment and credit card debt. Unfortunately, their creditors do know the difference, and when a debt falls delinquent will go after your assets or hire a debt creditor to collect.

But what is an asset as opposed to just debt? An asset is property or anything of monetary value that is either owned or can be used to secure debt. Tangible assets can include a house, a boat or a car, while intangible assets can be stocks, bonds or shares in a franchise, for example.

When a homeowner comes to the closing, usually he begins a mortgage with a bank in which he agrees to pay off the loan for the house in addition to the interest charged over a period of time. What secures this debt is the title to the house itself, and its value accumulates with each monthly payment. If he defaults on payments, his home can go into foreclosure.

Car payments are similar repayment arrangements, in which the car becomes the lien against the loan. If payments stop, the bank can withhold the title to the vehicle and repossess it.

What is unsecured debt?

Unsecured debt involves loans where there is no collateral to back them up, such as credit card debt. One silver lining in the current economy is a significant reduction in overall household debt for the second quarter of 2020. However, Americans still owe $82 billion in household credit card debt, according to the Federal Reserve.

While the bank cannot claim your assets if the unsecured debt is delinquent, they can hire a debt collector to go after you. They can report you to credit bureaus, ruining your credit rating. And they can file a lawsuit to garnish your wages or seize or put a lien on your assets.