While there are many different kinds of debt, all debts can generally be put in two categories – secured and unsecured. Knowing the difference between these two types of debt is crucial in debt settlement.
Unsecured Debt
Most credit card debt is unsecured debt. These are debts that are not secured with a piece of collateral. If you default on an unsecured debt, the creditor can’t take anything you own without first going to court, winning a lawsuit, and then getting the judge to allow them to take an asset. Until then, the creditor’s collection tactics are limited to typically phone calls, letters, updates to your credit report, and possibly a lawsuit. Signature loans and medical bills are other types of unsecured debts.
Unsecured debts are typically easier to settle than secured debts because creditors have limited options in getting money from you. If you file bankruptcy, the creditor would likely get nothing, so faced with that alternative, many creditors would let you settle your accounts.
Secured Debt
Secured debts are those that are secured by some type of collateral. If you default on a secured debt, the lender may have the right to take possession of whatever asset is tied to the debt. A mortgage is a good example of a secured debt. If you default on your mortgage payments, the lender generally has the right to foreclose on the home. A car loan is another kind of secured debt.
Because a lender has the right to take property for secured debts you don’t pay, it’s nearly impossible to get them to accept a settlement offer on a secured debt. They always have the option of foreclosing or repossessing the asset. You may, however, be able to settle deficiency judgments that may come after the asset has been repossessed. The deficiency judgment typically happens when the lender auctions off the asset, but doesn’t get enough money from the sale to cover the full balance of your loan. When this happens, depending on your jurisdiction or the method of foreclosure, you may be liable for paying the difference.
Prioritizing Secured Debts and Unsecured Debts
When you’re faced with the decision of which debts to pay, think about the consequences of missing payments on your debts. If you miss your credit card payment, what’s the worst that can happen? Probably just your credit score gets messed up and you lose the credit card. On the other hand, if you miss your mortgage payment, it could be harder to get caught up and you could eventually end up homeless. Would you rather be homeless and have access to a credit card? Or have a home but no credit card?
If your financial difficulties ultimately lead to bankruptcy, you likely will not be able to discharge a secured debt without first giving up the asset associated with the debt. On the other hand, credit card balances and other unsecured debts can usually be discharged in bankruptcy.
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