Secured Verses Unsecured Debt

Determine Which Debts Are Secured and Which Debts Are Unsecured.

Unsecured Debt

Unsecured loans have no collateral, no creditor ownership interest in the product sold to you. Unsecured debts are mere promises to pay and the product purchased on such terms is not subject to repossession. Unsecured debts should therefore be considered low priority debt.

Another reason why unsecured debts lack value to the creditor  is because unsecured debts are usually always discharged under Bankruptcy and the debtor is therefore under no legal obligation to repay the debt.

Secured Debt

The most common form of a secured debt is your mortgage. Each state has its own laws governing the foreclosure process. See our section on State Foreclosure Laws for a more complete understanding of the process.

Generally, lenders secure their loan by obtaining a lien (ownership interest) on the item(s) you purchased from them. In order to make the loan secure a creditor is required to do certain things to perfect their lien. The borrower must first agree in writing to give the lender a secured interest in the item purchased and the lender then needs to follow the laws in their state that require giving public notice of the creditors secured interest in the item purchased.

Loans for the sale of “goods” such as business office equipment are generally governed by Article 9 of the Uniform Commercial Code (UCC) under the heading of collateralized debts. This area of law governs all commercial transactions involving the sale and purchase of goods – including consumer goods.

Those lenders who have properly perfected their lien under their respective state laws are considered “secured” creditors. Under most circumstances, if you as a debtor default on a secured debt, the lender can simply repossess the secured item and resell it.

Car Loans

Car loans are secured loans. So if you need your car to get to work or find work, depending on your particular situation, this monthly payment probably will take priority, since if you default on your car payments, the lien-holder has the legal right to repossess your vehicle, and in most states, may obtain and pursue a deficiency judgment against you for the cost of repossession incurred as well as for the lost value of the vehicle.

Household Items – Secondary Importance For Repayment

Determine the secured property you can live without. For example, that $10,000 dinning room set from Macys that you financed or that off-road contraption you take to the sand dunes for some weekend fun. These types of secured debts, should go down to the bottom of  your repayment list. Depending on the age of the product and its price, there is very good chance the creditor will not try to repossess the item.

This is because generally, less expensive secured items like a computer or refrigerator typically have little resale value and therefore creditors make a cost-benefit analysis and usually determine not to repossess the item because it’s simply too time consuming and expensive to justify. It’s not because the seller really liked you and wants to give you a break.

Only After Your Financial Assessment Is Complete Should You Consider The Bankruptcy Option – And The Sooner The Better.

The Bankruptcy Option

What happens if after you have made a budget, figured out what you can cut, and explored ways to bring in more income, you are still under crushing debt that will prevent you from living at an acceptable level? Now that you are fully informed, this is the time to consider consulting with a bankruptcy attorney. We recommend you obtain the advice of at least two different bankruptcy attorneys before making your decision. A simple no-assett bankruptcy will likely cost in the range of $1,500 – $2,500.

We recommend, that even before you meet with the bankruptcy attorney, you take the time to first learn about filing for Bankruptcy and what this process entails. Specifically, learning the types of plans available, and what types of debts are actually dischargeable in bankruptcy. While your attorney will be able to answer all of these types of questions, by understanding the process and the general rules of Bankruptcy, you will ask better questions and feel more comfortable in the process.

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