The Difference Between Secured Debt & Unsecured Debt

When you speak with a bankruptcy attorney, you will be asked how much secured debt you have and how much unsecured debt you have. What is the difference and why does it matter?

Secured debt means the lender has collateral (an asset tied to the debt). Another way of saying this is that the creditor has a lien on your property. If you default, the creditor may be able to repossess the collateral. The most common secured debts are vehicle loans and home mortgages.

When you receive a bankruptcy discharge, most liens will survive. You will no longer have the legal obligation to pay anything toward those debts, but if you stop paying, the creditor will be allowed to enforce its lien by repossession or foreclosure. You can either keep the house/car/other collateral and continue making your payments, or you can surrender the collateral and stop making the payments. The choice is yours. Short version: if you don’t pay on a secured debt, the creditor can take your stuff. Secured creditors either get paid or they get their collateral.

With unsecured debt, there is no collateral tied to the debt. If you default, the creditor may sue you but it can not repossess, foreclose, or otherwise take your property, although a wage garnishment may be allowed. Typical unsecured debts include credit card debt, medical debt, student loans, and personal loans. Tax debts and domestic support obligations (child support, alimony, maintenance, etc.) are usually unsecured, but they often fall into a separate category known as “priority” debts. I’ll write more about priority debts in a future post.

Keep in mind that the secured/unsecured distinction is not a question of dischargeability. Whether or not a debt is secured or unsecured has no bearing on whether or not it is dischargeable. For example, your car loan is a dischargeable obligation, but the lien will survive the bankruptcy. Remember, secured creditors get paid or they get their collateral. And your student loan is probably nondischargeable (although there are exceptions), but it is still unsecured. The secured/unsecured question is one of collateral, not dischargeability.

It’s important to speak with your bankruptcy attorney about your secured and unsecured debts. I’ll write about why the difference between the two matters next time.

If you still have questions about the differences between secured and unsecured debt, feel free to ask on Facebook, leave a comment below, or send me an email. I’ll reply as quickly as I can.

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8 Comments

  1. My employer went chapter 11. I’m an unsecured creditor owed over 20K in severence pay — if I’m at the bottom of creditors – can I write off the money owed me if secured and priority creditors get paid first.

    thank you – fomer A&P / Pathmark employee

    • That’s more of a question for your tax professional. In general, the term “write off” is used to describe a deduction merchants can take for bad debt.

      But I wouldn’t be too quick to assume you’re not a priority creditor. Section 507(a)(4) of the Bankruptcy Code provides for certain debts owed to employees to be paid as priority claims. The limit doesn’t cover the full $20,000 in your case, but you may be able to recover about half of what is owed.

  2. I’ve been told that through a Chapter 13 you can strip a second mortgage and still keep the first mortgage and keep your home. If that’s true is the amount on the second mortgage or a portion of it included in the monthly payments that are made over the next 5 years back to your other creditors?

    • Thanks for reading!

      When you strip a second mortgage in a Chapter 13, the full balance is treated just like any other unsecured debt. If your credit cards and other unsecured creditors are getting paid a 20% dividend, the second mortgagee will get the same 20%. The holder of the stripped mortgage does not get any special treatment.

  3. How do you make a secured debt unsecured. The collateral is a car and a computer, the car needs to be junked and the computer as well.

    • The only way to turn a secured debt into an unsecured debt is to remove the lien. You can do this through bankruptcy (§522(f)) or by paying the underlying debt. If the collateral has no value, you can offer it to the creditor. However, in some states, the creditor may then sue for a deficiency (the difference between the value of the collateral and the amount of the debt).

  4. What if Attorneys are knowingly foreclosing on homes with unsecured debt, using fabricated documents to give the illusion its secured debt?

    • What you’re suggesting is a crime, and anyone with proof of it should report it to the local district attorney. What you’re describing is essentially stealing a house.

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