Types of Debt

There are two types of debt – secured and unsecured. If you have pledged property as collateral for a loan, the loan is called a secured debt. Examples of secured debt include homes loans and car loans. The loan is secured by the car or home, which means that the person you owe the debt to can repossess the car or foreclose on the home if you fail to pay the debt. Also, if you have a court judgment against you and there is a lien on your home, that may be considered a secured debt.

Unsecured debts are those debts for which collateral has not been pledged. Unsecured debts include medical debts and most credit card debts. Unsecured debt is generally wiped out by a Chapter 7 bankruptcy, and you no longer owe the creditor any money. With secured debt, you may have a choice of what happens, depending on the circumstances. If you are behind on your payments, the creditor may ask the court to lift the automatic stay in order to repossess or foreclose on the property. If you want to keep the property, you will need to cure the arrears and reaffirm the debt in bankruptcy. If you are not behind on your payments, you may be able to keep the property and keep making payments as before (again, you will need to reaffirm the debt in bankruptcy). If you have equity in the property, it may be sold to pay off the debt.

Legal Editor: James Shenwick, March 2015