Debt Vs. Unsecured Debt

Those with little knowledge of business and finance may not know the first thing about debt, including the difference between debt vs. unsecured debt. Fortunately, it is a simple subject you can get the basics of in just a few minutes. This subject is of particular interest to those who may be going through bankruptcy proceedings or facing civil judgments.

Secured Debt

Secured debt refers to debt for which there is a physical property involved or something else that can be repossessed. Two common examples of secured debt are car loans and mortgages. In these cases, there is physical property your creditor can take possession of if you fail to make your payments. Other common types of loans specifically tied to physical property include loans for furniture or computer financing.

Unsecured Debt

Unsecured debt is the opposite of secured debt. Any debt that does not have a specific piece of property tied to it is considered unsecured debt. While you may have a number of items in your possession that you purchased with a credit card you defaulted on, this is not considered secured debt. In most cases, a credit card company cannot repossess these items. Rather, they must take you to court and obtain a civil judgment.

Bankruptcy

Bankruptcy is one area where the difference between these debts comes into account. When you declare bankruptcy, most of your unsecured debts are discharged if you file Chapter 7. Further, you are allowed to keep certain types of secured debt, such as a mortgage, provided you are able to continue making payments on the house. Chapter 13 bankruptcies allow you to repay your unsecured debts in a structured manner at a lower interest rate.

Good Debt and Bad Debt

Not all debt is necessarily bad. Secured debt, in particular mortgages, help you build credit by allowing you to make a number of payments over a long period of time. Further, secured debt has a greater chance of increasing in value. Most unsecured debt depreciates quickly because you will either immediately consume it or use it in a manner that renders it relatively valueless. You should never carry more debt than you can reasonably pay off, regardless of what kind it is.