What is Unsecured Debt?
What is unsecured debt and how can it affect you as a borrower?
Quite simply, unsecured debt is any debt that is not tied ('secured') to an asset. Loans tied to an asset are secured loans. For example, if you have a car loan or a mortgage, the car or house acts as security for the loan. If you default on your loan, the lender can repossess the asset to recoup some of their losses. If a borrower stops making car payments, the lender can seize the car and sell it to earn back some of the value in the loan. The same goes for a mortgage: the bank can repossess the home if a borrower stops making mortgage payments.
Unsecured loans are the opposite of this: they have no physical assets associated with the loan, i.e. there is nothing to repossess if the borrower stops paying. Credit card debt is a very common example of this kind of debt. The credit card borrowing was not secured by a particular asset, so it can be much more difficult for the lender to collect the money. Private bank loans taken out for university tuition or maintenance are another example of unsecured debt, as the lender cannot take away your degree for not repaying your loans, and there is no re-sale value in a degree even if they could. Most people have a combination of secured (mortgage, car loan, etc.) and unsecured (utility bills, credit cards, etc.) debt.
Does this mean that unsecured creditors can't take anything from you if you go bankrupt?
Not exactly. Unsecured creditors often lend at a higher interest rate because of the risk involved in lending without securing the loan with an asset, but if you go bankrupt, unsecured creditors can still sue to claim a portion of your remaining assets.
What should borrowers do if they have trouble repaying unsecured debt?
We believe that the best thing you can do if you're facing any kind of financial difficulty is to learn as much as you can about your finances and your options. The first step in this process is to seek independent advice from qualified advisors. Talking to a professional advisor can give you piece of mind and help you get a better understanding of your situation and the options that would be best for you. If you don't feel completely comfortable after speaking to someone, you can always get a second opinion.
Once you have a thorough understanding of your options, then you can work on getting a plan in place to solve your debt problems. Debt and understanding your financial affairs can seem confusing at first, but once you understand what's involved, you will be able to make the best decision for you and your family. Creating a plan tailored to your specific circumstances and following through on it will allow you to regain control of your life, rather than letting your financial affairs control you.
If you have questions about your financial circumstances, you can contact our office for expert, confidential advice.