The truth about unsecured debt

December 20, 2011 by
Filed under: Bankruptcy, Debt Management, debt relief 

There are (technically) two types of loans you can make. Understanding the difference is quite important if you want to achieve relief from debt. One is “secured”, meaning that you’ve put up a major asset (like your house) as a security against the loan. This means that if you default on that debt, the creditor can then cash in against that security.

The second is an “unsecured” loan. You might be led into believing that this type of a loan is an act of faith by the banks, based on things like your credit rating, your employment and your income. Technically, if you default on this type of a loan (typically a credit card or a line of credit), the bank has reduced collection powers. But they can still sue you. And if they sue you, OR if you declare bankruptcy, they (being the judge or the Trustee) can force you to sell your assets (like your house) and then repay your debts from the proceeds.

In reality, the difference between “secured” and “unsecured” loans is who has dibs. Typically, for instance, a mortgage is secured. The mortgage company will hold the deed to your house until you’ve paid it off in full (plus 150% in compounded interest), so technically, you never really own your house until it’s entirely paid off.

Any other loans that are “secured” against an asset become preferential, meaning that they will be paid off first when the assets are sold. Unsecured loans, typically credit cards and lines of credit, get to fight over what’s left, if anything at all.

But secured or unsecured, they’ve got your assets.

The study of money, above all other fields …  is one in which complexity is used to disguise the truth or to evade the truth, not reveal it.

– John Kenneth Galbraith, Money, Whence it came, where it went, 1975.

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