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The Difference between Secured Debt and Unsecured Debt

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by , 08-07-2011 at 06:05 PM (1637 Views)
Secured debt is when there is an underlying asset, or collateral, on the debt. Assets that support a debt are called security. If the debtor defaults on the debt, the creditor has the right to seize the security. A secured claim is a claim where the creditor has the right to take back certain property if the debtor does not pay his or her debt. Perhaps the clearest example of a secured debt is a home mortgage. With a home mortgage, a bank, or other financial institution, makes a loan to the home-buyer with which the buyer buys the home. The buyer lives in the home and pays a monthly payment to the bank. The payment is comprised of principal, interest, insurance, and some other small expenses. The home is the security on the mortgage. If the buyer defaults on the mortgage payment, the bank will take the house back. This is where bankruptcy comes in. If the debtor files for bankruptcy, he or she may be able to keep the house and work out a way to become current on the mortgage payments.

Unsecured debt means there is no underlying asset, or collateral, on the debt. Unsecured debt is a loan given with no collateral. With unsecured debt, there is no tangible property attached to the debt that can be taken away if the debt is not paid. Unsecured debt commonly consists of credit card debt or hospital bills. With these debts, there is no piece of property that a credit card company or hospital can seize if the debtor defaults on the debt.
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