Secured vs. Unsecured Debt


SECURED DEBT is specifically tied to certain property, typically by a lien, giving the lender the right of repossession. (In the case of a possessory lien, the lender holds the security-property as long as you owe the debt: The pawnbroker holds the ring you pawned; the landlord or utility company holds your cash security deposit.) The classic examples are a home mortgage and a car loan; if you don’t make your mortgage payments, they’ll take your house; if you don’t make the car loan payments, they’ll take the car. The property secures the debt; the property is the lender’s “security interest.”  When we borrow money to buy a thing (home, car, TV, etc.) and the debt is secured by that thing; that’s called a “purchase money security interest” or PMSI.  Most liens are consensual – we agreed to it, in exchange for the cash or the thing that we got – but statutory and judgment liens are also quite common.

UNSECURED DEBT is everything else – most credit card debts, medical debts, some tax debts (those without a lien), student loans, back rent & utilities (except for what’s covered by security deposits), the money you borrowed from your best friend or cousin – most of those debts are unsecured. If an unsecured creditor is not happy with how you are paying (or not paying) the debt, they have no property they can repossess. An unsecured creditor must first go to court, sue you, get a judgment, then try to execute on the judgment, typically by sending the sheriff out to try to glom onto your non-exempt property.

Bankruptcy addresses primarily unsecured debt – even in bankruptcy, if you don’t make the mortgage payments, they’ll take your house, and if you don’t make the car payment, they’ll take your car.

[important]UNSECURED DEBT (mostly) gets wiped out in bankruptcy.  SECURED DEBT must be paid (mostly) or the collateral must be surrendered.  [/important]