Unsecured debt is debt that is not guaranteed or “backed” by any collateral. Essentially this means that if you default on an unsecured debt there is nothing that the creditor can take from you to recoup their losses. Interest rates tend to be higher on unsecured debt because there is no collateral for the creditor to seize. Credit cards fall into the category of unsecured debt. Because credit cards are unsecured they cannot seize any of your possessions if you do not pay off the balance. Creditors attempting to collect on a delinquent unsecured debt typically turn the account over to a collection agency. These collection agencies will often use a law firm to sue you in an attempt to collect on the unsecured debt.
Secured debt is debt that is backed by some type of collateral. Mortgages and vehicle loans are two examples of secured debts. With a secured loan if you allow the loan to become delinquent, the lender can foreclose on your home or repossess your vehicle. Because there are assets the lender can use to potentially recoup their loss in the event of a loan default, interest rates are generally lower on secured loans.
What happens to different types of debts in Bankruptcy?
Generally speaking all unsecured debts are discharged in bankruptcy. This means you will not be responsible for debts such as; credit cards, medical bills, or an cell phone bill. However, with secured debt you must either continuing paying on the debt or risk losing the collateral. For example, if you have a car that you want to keep and you file for bankruptcy, then you must keep paying on the car or else you will it. However, if you have a vehicle that you don’t want to keep then you can stop making the payments and surrender it to the bank. Once you have filed bankruptcy then the banks only recourse will be to take back their collateral, they may not also pursue you for any losses.