What is unsecured debt and why does it matter?

There are two main types of debt – secured and unsecured. Secured debt means that there is a lien on some property that guarantees the debt. For example, a loan on a house has a mortgage that is recorded against the property. A mortgage is a secured debt with a lien against the house.  It must be recorded with the local county recorded.

Likewise an automobile loan is secured by the automobile and the lien is recorded with the Department of Motor Vehicles.  If you borrowed money but the lender isn’t on the title then the loan isn’t perfected and there is no lien.

Most credit card debt is unsecured. Once in a while there is a security interest as in a Sears’s account or other store where you make a major purchase. They may have you sign a document that states they have a security interest in the property until it is paid for. The majority of credit card debt is not secured by the purchases that are made.

Medical debts are also usually unsecured. Once in a while a practitioner may ask for a security document but it is very unlikely. The normal procedure is to submit the bill to your insurance company and then bill you for the unpaid portion. If you have any major medical issues it can quickly add up.

Sometimes unsecured debt can become secured debt

If there is a judgment taken for a past due credit card debt it can become a lien against property which will change the nature of the debt.  Never ignore court paperwork as the time lines run quickly and a creditor can obtain a default judgment.  That means you never even went into court but they got a judgment and can enforce it in many ways.  One way a creditor tries to collect is to record a lien in the county where you live.

It matters because secured and unsecured debts are treated differently under the law and must be designated properly for each case that is filed.