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Secured vs Unsecured debt
July 15th, 2007 by Shenron
A secured debt is one wherein the creditor maintains a security interest on a tangible property or any piece of item that is attached to the debt. If you fall behind on payment with this kind of debt, the creditor can reclaim the property that is used as security for the debt. Common secured debts include house and car loans. Such things can be easily repossessed when repayment of overdue amount is not done on time.
An unsecured debt on the other hand is a debt acquired by borrowing from creditors without any personal property being used as collateral for the debt. When payment for this kind of debt is overdue, creditors may take legal measures against the debtor but will usually arrange a debt resettlement scheme. Common examples of unsecured debts are credit card loans, medical bills, commercial debts and personal loans.
A secured debt may however turn into an unsecured debt. This happens when the sale of the property does not cover the full amount of the debt. The deficiency will still be paid by the debtor and since he does not have any more property attached to the debt, it has become an unsecured debt. Just like most unsecured debts, this is usually resolved through a debt resettlement program.
The difference between the two types of debts also becomes relevant when someone is applying for bankruptcy. When someone has applied for a Chapter 7 bankruptcy, he can choose not to give up the property and instead pay the debt in some other way. However, if he cannot do so, the bankruptcy court will have to take away the property (and even some of the properties not attached to the debt), and the debt is paid off that way. As discussed earlier, when the sale of the property that has been repossessed is inadequate to cover the debt, the debt becomes unsecured.
Those who have a steady income with disposable income, choose Chapter 13 bankruptcy. In this type of bankruptcy, one is allowed to keep the property or product and has to pay back his creditors according to the Chapter 13 plan. Most probably, the court will order that the creditor charge the debtor 10% interest although he was probably paying a much higher interest than that. Usually, the court will propose a repayment plan over a span of three to five years. The ceiling is set at five years and one cannot have a plan that exceeds this period.
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