Consumers across the U.S. borrow money every day. Some obtain unsecured loans, while others pursue secured loans. When it comes to discharge in a bankruptcy filing, the differences between the two are significant.
Unsecured debt is borrowed without the security of collateral, like a home or car. Lenders lending unsecured debt look into a borrower’s credit score, overall borrowing history, and other factors to determine whether to issue the loan.
Unsecured debts can take many forms and include but are not limited to the following:
- Credit cards
- Medical bills
- Student loans
- Personal loans
If any of these loans cannot be paid back and the borrower opts to file bankruptcy, it’s likely they will be discharged with no lender recourse.
Secured debt or a secured loan occurs when a person borrows money and puts up an asset, like a home or vehicle, as collateral. If the borrower defaults, the lender can start repossession proceedings to obtain the collateral.
Specific examples of secured debt include:
- Motor vehicle loans
- Home equity loans
- Home equity lines of credit
Pros and cons
Unsecured loans usually have higher interest rates than secured loans. They often range from 15 percent to 24 percent. Conversely, secured loans often have lower interest rates. Some also often come with tax benefits, like the ability to deduct mortgage interest paid on annual tax obligations.
Loans and bankruptcy
When it comes to bankruptcy, unsecured loans, like credit card balances, are much easier to erase. For secured loans, like a car, it gets tricker. If a consumer wishes to keep the vehicle, a Chapter 7 may not be a viable option.
Anyone with either type of loan who is contemplating filing for bankruptcy should consult with a local bankruptcy attorney who can explain the law in greater detail and options available for specific circumstances.