Unsecured debt is any type of debt that is not backed by some sort of asset such as a home or a car. With unsecured debt, the lender may have to sue the borrower if they do not pay, in order to obtain the money that is owed to them. Due to the risk that they won’t get paid, creditors often impose higher interest rates on unsecured debt.
Secured debt, on the other hand, is backed by collateral, which is any asset or property such as a home. If the person is unable to pay back the loan or the debt, the lender can then seize the collateral in order to make up for the unpaid debt. The most common form of secured debt is a mortgage home loan, which is backed by the home itself.
What Are Some Examples of Unsecured Debt?
Unsecured debt includes different types of debt such as:
- Credit card debt
- Debt arising from medical bills
- Debt from utilities
- Student loans
- Debt related to certain types of court judgments
Lastly, any type of personal loan that does not require the borrower to put up any assets as collateral may be considered unsecured loans.
Are There Any Consequences for Not Paying Back Unsecured Debt?
In many cases, a creditor may sue the borrower in the event that they fail to make payments, also known as defaulting, on the loan. This will usually result in wage garnishment. Garnishment of wages happens when the creditor is allowed to directly take a portion of the person’s paycheck in order to satisfy the loan debt.
With unsecured debt, the creditor can still reach the person’s assets and property. However, they will usually first have to file a lawsuit. This is different from a secured debt, where the creditor can seize the property without a lawsuit. The reason they can do this is that the borrower usually agrees to hand over the collateral property in the event of a default, as part of the loan contract terms.
Prior to a lawsuit, the borrower may have several options available to them, such as negotiating with the lender for debt cancellation or by filing bankruptcy to obtain a bankruptcy discharge. The creditor can also take less drastic measures, such as reporting the non-payment to a credit agency and ruining the borrower’s credit score.
Do I Need a Lawyer for Assistance with Unsecured Debt Issues?
Unsecured debt can often be easier for a borrower to obtain than secured debt. However, unsecured debt is also associated with various legal issues, and with certain types of legal disputes. You may need to hire a finance or bankruptcy lawyer if you need help with any unsecured debt issues. Your attorney can help research your state’s laws to determine what your rights are according to credit and finance laws. Also, if you need to file a lawsuit or if you need to attend a court hearing due to a legal dispute, your lawyer can represent you in court as well.