There are two types of debt: secured and unsecured. Unsecured debt is any financial obligation that doesn't require you to put up collateral that could be taken back (repossessed) if you fail to make the agreed upon payments.
Unsecured VS Secured Debt
According to Bankruptcy Home.com the main difference between secured and unsecured debt is that there is no tangible property connected to the latter. The type of debt you have can be of particular importance during periods of financial hardship and/or when filing for bankruptcy.
Examples of Unsecured Debt
Some typical examples of unsecured debt include credit cards and credit lines, health club memberships, cellular telephone bills, medical and legal bills, department store cards and magazine and record club fees. Consolidated Credit Counseling Service (CCCS) says unsecured debt can also include money owed to family or friends as well as some education loans.
Examples of Secured Debt
A secured loan is when the borrower agrees to give the lender property (collateral). A home mortgage is a common example of secured debt. According to Investopedia.com, your house is viewed as collateral toward the home loan. If you renege on the payment, the mortgage lender assumes possession of the property and sells it recoup the money it lost from your default. Other typical examples of secured debt include cars, boats and furniture.
Non-Payment of Unsecured Debt
When you are unable to make payments on an unsecured debt, a creditor or collection agency may threaten to take legal action against you. According to BCS Alliance.com, all states have laws that provide debt collection exemptions in certain situations and protect those with low incomes from undue wage garnishment. For example, individuals who lived on a fixed income may be able to have an unsecured debt discharged without filing for bankruptcy.
Unsecured Debt & Bankruptcy
In a typical Chapter 7 bankruptcy all of your unsecured debt will be usually be erased once your case is discharged. In a Chapter 13 proceeding, you will set up a payment plan to repay your unsecured debt. According to Bankruptcy Home.com, you may be given a lower interest to help ease the financial burden. Your payments will be based on your estimated income over the next few years.
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