Q.What is the distinction between secured and unsecured debt?

A.If you owe money, your debt will be either secured or unsecured.  There are important differences between these two types of debt:  secured debt provides the creditor with collateral in the event of default; unsecured debt does not. Therefore, certain types of loans made to consumers may be secured or unsecured, depending on whether the creditor obtains collateral.  Personal loans, lines of credit and bank overdrafts may be secured or unsecured debt.  A few credit cards currently in circulation provide the creditor with collateral, and are therefore secured debt.  In the event of non-payment, unsecured creditors face a much more difficult time recovering their money than secured creditors.  In addition, a discharge from bankruptcy does not affect a bankrupt’s secured debts, only the bankrupt’s unsecured debts.

Secured debts

The most common secured debt is a mortgage on a house or other real estate, and loans to purchase a car.  Homeowners who mortgage their property provide the lender with a security interest in their property.  Similarly, where a person borrows money to purchase a car, the lender will usually register a lien against the car.  In the event of non-payment, the lender can recover his money by foreclosing on the mortgage, or repossessing a car.

Unsecured debts

Unsecured debts, however, provide no collateral to the creditor in the event of non-payment.  Almost all credit card debt is unsecured debt.  In addition, a significant percentage of personal loans and lines of credit, particularly for smaller amounts, are unsecured debt, as are student loans, income taxes and monies owed to utility companies for services such telephone, water, internet and cable.