What is the Difference Between Secured Debt and Unsecured Debt?

Posted by Isaac Nicolay | Posted in Credit Report | Posted on 26-07-2010

The most straightforward way to understand the difference between unsecured and secured loan is to work out if your creditor can take away any item or property in the case that you are not able to repay the overdue amount in time.

The basic difference between secured and unsecured debts is that in unsecured debts there is no tangible property or any other kind of product that is attached to that debt, whereas for a secured debt there are tangible items that are attached to the debt. Common examples of unsecured debts are arrangements such as credit cards, medical bills and store cards where you do not have to put up any material as security for the debt. On the other hand, things such as mortgages and car payments usually have tangible items attached to it, i.e.: your house or car.

The difference between the two types of debts is applicable when someone is filing for bankruptcy also. In Chapter 7 Bankruptcy you can make the choice of either keeping the product or property and pay of your debt in some other way. But if you decide that you cannot pay at all then you also have the option of giving the product or property back and paying off your debt in that way. On the other hand, in Chapter 13 Bankruptcy you are allowed to keep the merchandise or property but you will be allowed to pay off your debt according to the Chapter 13 plan. That is to say the bankruptcy court will most probably allow the creditor to charge you only about 10% interest, whereas you most probably were paying a much higher interest than that. However, if the value of the item is less that the value of the debt, then the outstanding about that is not covered by the item will be paid as an unsecured debt without interest.

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