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Debt Reduction Education

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Secured and Unsecured Debt

Secured debts are debts that you have collateralized with an asset that you own.  The asset is referred to as collateral.  When a debt is collateralized, a lien is put against your asset by the lender.  The lender has the legal right to take the asset if you fall behind on your payments.  A good example of a secured debt is your mortgage and car loan.  If you fall behind your payments, your house is foreclosed and your car repossessed.

Unsecured debts are debts that creditors do not have liens on your assets.  Many credit cards are unsecured debts.  The creditor does not have liens on any of your assets.  If you don’t pay an unsecured debt, the creditor will try to get you to pay by using a debt collector and placing the non-payment of debt on your credit report.  The creditor must sue to get the court to try and collect the money you owe.  The creditor may ask the court to seize your assets, place a lien on an asset so you can’t borrow against it or sell it without paying off your debt first, or garnish your wages (if legal in your state).

Keep in mind that certain unsecured debts should be treated as top priority because on potential consequence of not paying.  There maybe grave consequences (large fines or even jail time) if the following unsecured debt aren’t paid:
  • Federal income taxes – Uncle same has almost unlimited power to collect taxes due.
  • State income taxes – Your sate can sue you, seize your property and/or garnish your wages
  • Federal student loan – The IRS can collect what you owe if you fall behind.
  • Health insurance – Keeping your health insurance is vital especially if you or a family member has ongoing health problems.  Not having insurance, could put you in bankruptcy if you have a serious illness or accident.
  • Child support – If your child support is court ordered and you fall behind, there maybe grave consequences such as wage garnishment, liens on our assets, liens on your bank/investment accounts, suspension of your driver’s license, deny/suspension of your passport, fines and even jail.
  • Medical bills – Healthcare providers and hospitals are aggressive about collecting on patients past-due account and even suing patients.

 

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