There are two primary types of debt: secured and unsecured. The easiest way to understand whether or not you have secured or unsecured debt is to determine whether or not a creditor can take away an object or your property in the event that you suddenly become unable to make payments on the account.
If a creditor can take away tangible property or another item that is somehow attached to the debt, then that is a secured debt. If nothing can be taken from you if you stop making your payments, then that is considered an unsecured debt.
Unsecured debts are usually credit cards, unless you happen to get one of the handful of secured cards available on the market. A secured credit card can be a prepaid card (secured by the amount of your actual deposit), or a card that is secured by some other property or object. Medical bills are also considered an unsecured debt- as you did not have to put up an item as collateral in order to obtain the debt.
Secured debts are commonly large ticket items like mortgages and cars. If you fail to keep up with your mortgage payments, then the bank or mortgage lender can take your home as payment. If you don’t keep up with your car payments, the lender of your vehicle loan will repossess your car.
Once you own a home and build equity, you are able to take loans out on the equity you’ve built. These equity loans are secured debts because they use your home as collateral. If you are unable to pay for your home equity loan, they’ll just take your house to pay for it!
When the Type of Debt Matters
If you are unable to keep up with your expenses and bill payments for one reason or another, the type of debts that you have will make a big difference if you end up having to file for bankruptcy. Most unsecured debts can be eliminated under a Chapter 7 bankruptcy, while secured debts may have to be sold in order to obtain money to pay off other debts before the consumer is eligible to file for bankruptcy.
Good Debt Vs Bad Debt
Believe it or not, not all debt is considered “bad”. It’s a lot like cholesterol in the body- some of it is actually considered “good”! Good debts are those that are used to help build wealth. A mortgage can be seen as a good debt, since the debt has given you the value of the home, and houses increase in value in many cases.
Bad debts are debts that depreciate in value after you’ve purchased them, or purchases for disposable items. Bad debt is typically created by credit cards that are not used wisely or carefully. Personal debt for Americans is on the increase, and credit has actually become easier to obtain than it was in previous years. At one time, credit card issuers looked for customers with strong credit scores, and a proven track record of making payments on time to lend money to; now, it’s almost the opposite! Some credit card companies allow people who are likely to charge more than they can reasonable afford to pay, so that they can charge interest rates of 18%, 20% or higher on the balances, not to mention over the limit fees, late payments or finance charges.
While “bad” debt should be avoided whenever possible, it’s a good idea to keep access to credit cards or loans of some kind, for emergency purposes.