The Differences Between Secured Debt and Unsecured Debt

The Differences Between Secured Debt and Unsecured Debt
When filing for bankruptcy, it is important to consider
whether the debt you owe is a secured debt or an unsecured
debt. The court's ruling will depend on what specific type
of debt you owe to your creditors.

How does a secured debt differ from an unsecured debt? As
the name suggests, a secured debt uses a form of security
for the money owed. The security may be real estate
property such as a home or a lot. The borrower signs a
contract that agrees to surrender this property in case he
fails to pay off his dues. Thus, the security or collateral
serves as protection for the creditor against the risk of
default. The most common examples of secured debts are car
loans and mortgage loans.

On the other hand, with an unsecured debt, the borrower is
not required to submit any form of security or collateral
to his creditor. The creditor will grant a loan approval
solely based on the borrower's credit history. An unsecured
debt has a higher interest rate than secured debt because
it puts a higher risk for the lender. Usually, credit
cards, department store cards, and other similar debts are
unsecured because they are not tied up to any property.

How does your type of debt affect bankruptcy? If you're
filing Chapter 7 Bankruptcy, the borrower has the option to
choose whether he wants to keep his property and pay his
creditors instead or surrender his property as payment for
his debts.

In Chapter 13 Bankruptcy, the borrower is allowed to keep
his property provided that he agrees to pay back all his
debts to his creditors. The borrower will then be subjected
to new payment terms that will be arrange by his lender.
The bankruptcy court allows lenders to charge up to a 10%
interest rate to give the borrower the chance to pay back
more easily. If the borrower was paying a 15% interest on
his loan before filing for bankruptcy, the 5% less interest
will be a tremendous ease to his load. Moreover, if the
borrower's debts are less than the value of the property he
submitted as security, he has the option to make repayments
without any interest.

With an unsecured debt, if an individual has already filed
for bankruptcy, the creditor will have to stop all its
attempts to collect debts from the borrower as the ordered
by the bankruptcy court.

In some cases, the lender can file a petition to the
bankruptcy court if there is any dispute about the type of
debt owed. If the bankruptcy court denies this petition and
declares that the debts are unsecured, the lender must stop
taking any action against the borrower. If the lender
violates this rule, he will be facing punishment from the
bankruptcy court.

Clearly, understanding the type of your debts plays is very
important. As the borrower, it protects you from any
violation from your lenders and it knowing what your
options are, will enable you to decide more efficiently
with regards to your debts especially when financial
difficulties arise.

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Liz Roberts is a loan consultant with NHBS Inc. offering
helpful advice on repairing bad credit. Visit our site
http://www.newhorizon.org/Info/securedcc.htm

to apply
online for a secured credit card