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There are two different types of consumer debt. There is secured debt which is a loan that is guaranteed by specific collateral and there is unsecured debt which is not secured by specific collateral. It is important that consumers understand the differences between the two types of debt, especially if they are having trouble making their loan payments, because the different types of creditors have different rights when it comes to collecting money from you and they have different priority when it comes to bankruptcy proceedings.
As mentioned above, secured debt is a loan that is attached to a specific piece of property. The most common example is a mortgage which is, most often, secured with the property or home that the loan is used to purchase. So, if a borrower is having trouble making his mortgage payments and defaults on the loan, the lender can take back the property or the home in order to satisfy the debt. If the loan was not secured by the collateral (in this case the home or property) then the lender would have the same rights as other unsecured lenders and need to try to recover the money from the borrower’s total assets. It would not have any specific right, or priority in, the property or the home.
Typically, secured loans are offered at a better interest rate and better terms than unsecured loans because of the added protection that the collateral provides the lender.
In contrast to secured debt, unsecured debt is provided to a borrower without any specific collateral. For example, credit cards are unsecured debts. If a borrower stops making payments on his or her credit card, the credit card lender is able to sue the borrower for repayment but does not have a right to any specific piece of property. So, while a judge could order that property be sold to satisfy debts, the unsecured lender has no ability to require the sale absent a judicial ruling.
While this might sound like an academic discussion since the borrower retains the obligation to repay all of his or her lenders, whether they be secured lender or unsecured lenders, the discussion is far from merely academic. While in theory the borrower has the responsibility to repay all of his or her debts, that is not always possible. If the borrower is defaulting on loan payments then the borrower may lack the funds to repay all of his or her obligations. Often, the borrower is left with no choice but to file for bankruptcy.
In a bankruptcy proceeding, secured creditors are entitled to the collateral which guarantees their loans in the order that the loans were made. For example, if a homeowner has an original mortgage that was properly executed and filed and then a second mortgage that was taken out at a later time and properly executed and filed and both loans were secured by the same property, then the original mortgage loan takes precedence over the second mortgage. It is only after both loans have been fully satisfied that unsecured lenders are entitled to any proceeds from the sale of the property or home.
Loan obligations, including student loans, car loans, mortgages and credit cards, can quickly become overwhelming. Therefore, it is important to understand your creditors’ right to recover payment from you and the priority in which they are entitled to do that.
This article is intended to be helpful and informative. But even common legal matters can become complex and stressful. A qualified bankruptcy lawyer can address your particular legal needs, explain the law, and represent you in court. Take the first step now and contact a local bankruptcy attorney to discuss your specific legal situation.