Secured vs Unsecured Debts


While many people understand that bankruptcy cases generally revolve around an individual's or group's accumulation of a significant amount of debt, far fewer individuals truly understand the different kinds of debt that can lead to these serious financial burdens. With many people facing the possibility of bankruptcy as a real option as a result of debts incurred during the recent economic downturn, it is important to make sure that there is a certain level of understanding of different classifications under which debt can fall. One of the most important distinctions to be made when considering single instance of debt is whether that loan is "secured" or "unsecured."

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When a person accepts a secured loan, they are offering some asset or property as an assurance that they will make the agreed payments necessary to repay the debt. If the borrower is unable to (or does not for any other reason) make the required repayment, the creditor can take possession of the debtor's property. Secured debts are intended to free creditors of the risks generally associated with making loans to individuals who they fear may not be able to fully repay their loans. The advantages to secured loans are not only on the creditor's side, though. If a borrower has confidence that they will be able to fully repay what they borrow, a secured loan may be able to offer better terms than a unsecured loan of a similar amount. The interest rates may be significantly lower or the repayment period may be longer, for example. Home mortgages and car loans are common examples of secured loans.

On the other hand, unsecured debts are not backed by any collateral. The creditor cannot seize any of the debtor's property in the event that a loan cannot be repaid. As a result, unsecured loans are much more difficult to get, and will usually have significantly less favorable terms for borrowers. Credit cards are easily the most frequent source of personal unsecured debts, though certain credit cards may result in secured debts.

Knowing the difference between secured and unsecured debts can help consumers know whether or not they face immediate repossession of their property while they are trying to decide how to handle their financial problems. It can also help an experienced bankruptcy lawyer help the person determine whether or not filing for bankruptcy is a good option for the situation.

For more information about secured and unsecured debts, speak to an experienced lawyer today.


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