Secured and Unsecured – Know your debts before consolidating them

You have to confirm the truth before opting any debt settlement process. But most of the time, clients were confused..whether they are suffering from secured debts or unsecured debts.

So, let me clear up the confusion a bit. There are normally two basic types of debt which you may encounter in your daily life. One is called secured debt and the other one is named unsecured debt. Both of them plays a significant role in case of bankruptcy. Read below for getting an explanation on how you can distinguish between them. Simultaneously we can also learn some terms and concepts of debts.

Some debt terms which you need to know

Collateral – A kind of interest, given rights or submitted authority given by a borrower to a creditor. In return the creditor will give you a valued something, may be a loan. When you give any valuable thing as collateral for a loan, it is called securing the loan. It will reduce the creditor’s risk if any case the loan amount is not returned fully.
Mortgage –When a borrower gets some money by giving his valuable asset to the creditor, it is called taking a mortgage. The term “mortgage” is often used to mention the agreement or the loan.
Lien/Charge/Encumbrance – It is applied on an asset. The creditor has the right to hold a lien on his mortgaged property. It restricts the common rights for the borrower on his mortgaged asset.

You can definitely understand the various terms and their differences regarding secured and unsecured debts. A secured debt is always protected by a collateral. An unsecured debt does not have such collateral associated with it..

Secured debts

*The highest secured debt is the mortgage loan which most people takes during their life. The mortgage loan normally availed by the consumers due to purchase of a house. The loan is secured by a mortgage on the house itself.

*Another biggest secured debt is called car loan which is positioned in the second. Most of people preferred loan against cash buying while taking a car loan.

*As a borrower, if you didn’t pay off the loan, your creditor or lender can easily recover the money. They will use your given collateral and auction it to get their money back. This is called foreclosing. If the creditor gets more from the sale than he actually deserves, he has the duty to return the excess amount to the debtor. If the creditor gets less from the sale, the debtor will be liable to pay him the balance amount.

Secured debts are normally not get released in a bankruptcy. If anytime you will face bankruptcy, your mortgage will not be removed from your name. If you want to keep your house, even after bankruptcy, you must be current to your monthly secure debt payments..

Unsecured debts

Credit card debt is a kind of unsecured debt. Many of us think that after hitting by a bankruptcy, the unsecured debts will not be removed from your name, and the commodities will also be repossessed by the credit card company. Normally what you originally owe on your card is considered as unsecured debt.

But if you invest a huge amount towards buying furniture just before the day of bankruptcy filing, it make it a secured debt, because no lien was registered against your furniture.

Most of your bills will be considered unsecured debts. There are few examples like taxes, utility bills, and medical bills. All of these debts can be discharged by a bankruptcy.

Unsecured debts have much higher interest rate than a secured debt. It is because unsecured debts have higher risks, way more than secured debts. So it is better for you to pay off the unsecured debts first to save your money.