What Is ‘Secured’ Debt?

A “secured” debt is a debt where you have pledged property (also known as “collateral”) to ensure your payment of the debt. In other words, if you are unable to pay the debt, the lender can take the collateral and have the collateral sold to generate funds to pay the debt.  You can also call it a "secured lien".

Since secured debt is a loan that is guaranteed by collateral, the lender can offer better rates than an unsecured debt.

Those rates can be variable or fixed.   Collateral is an asset used to secure a loan; it is something that the lender can take if the borrower defaults. Common examples of secured debt are your mortgage loan (secured by your house) and your car loan (secured by your car). Sometimes household goods (TV, appliances, pianos, etc.) can also be secured to pay the debt owed to the seller of the goods.

The repossession and sale of the collateral does not necessarily result in payment in full of the debt.

If the sale of the collateral does not result in full payment of the debt, the amount of the shortfall (known as the “deficiency”) will still be owed to the creditor, unless the deficiency is then discharged in bankruptcy. Different rules apply for mortgage foreclosures so an analysis of your particular situation is required.

Unsecured debt is debt that is not backed by an collateral.

Common examples of unsecured debt are you credit cards, payday loans, general consolidation loans, and medical bills.  Note that even a lawsuit or a court judgment is an unsecured debt. A court judgment can only become a secured debt if the creditor records an abstract of judgment where you own real property.  If you do not own any real property the recording of an abstract of judgment is of no consequence.

Secured versus unsecured debt matters in Chapter 13 bankruptcies and is of a lesser concern in Chapter 7 bankruptcies.

In Chapter 7 bankruptcies, a debtor must list all secured debt on the schedules but the liens ride through the bankruptcy unaffected by the discharge. That means that the house can still be foreclosed on and the car repossessed if payments are not made post-discharge. in Chapter 13 bankruptcies, secured claims have to be provided for in the Chapter 13 plan. That means that secured mortgage arrears and secured tax liens have to be repaid as part of the 3-5 year plan term. Call us at (925) 472-8000 for a review of your situation.