When a lender makes a large loan—such as for a home or a car—the borrower must put up property (collateral) to guarantee payment of the debt. If the borrower falls behind (defaults) on the payment agreement, the lender can foreclose on the home or repossess the car. A collateralized debt is known as a “secured” debt.
Stores that sell electronics, furniture, or jewelry often require you to secure credit with the purchased property. If you don’t pay your bill, you’ll have to return your television, earrings, or couch to the store. To find out if you secured your purchase, check the fine print in the credit contract or on the back of your sales receipt.
An “unsecured” debt is a credit account that the borrower didn’t guarantee with collateral. For instance, if you don’t make your credit card payment, the creditor can’t take back the sporting equipment that you bought the prior month. Instead, the unsecured creditor must file a lawsuit and obtain a court judgment for the amount you owe before it can use certain collection tactics, such as taking money out of your bank account (bank levy) or instructing your employer to deduct money from your paycheck (wage garnishment)
Examples of unsecured debt include:
- credit card balances
- medical bills, and
- personal loans, such as a payday loan or a loan from family or friends.
Be aware that certain creditors—for instance, if you owe taxes, the government—can use collection tools without first getting a court judgment.
Go to the main bankruptcy FAQ page.