Are you struggling with your finances and considering filing for bankruptcy? Before you take that step, it is crucial to understand the different types of debt you’re dealing with. Secured and unsecured debts might sound similar, but they can significantly impact your financial future.
Knowing the difference between these two can help you make smarter decisions about your money and potential bankruptcy options. Read on and learn the key differences that could change your financial action plan.
Unsecured debt
Unsecured debt refers to financial obligations without any collateral. This form of borrowing relies solely on the debtor’s promise to repay without tangible assets securing the loan.
When there’s no collateral, lenders evaluate a borrower’s trustworthiness to reduce risk. They usually check the person’s lending history and income. Some common types of loans without collateral are credit card balances, personal loans, medical bills and student loans.
Secured debt
A distinguishing characteristic of secured debt is the provision of collateral by the borrower. This asset serves as a safeguard for the lender, allowing repossession in case of late payments. Various assets can function as collateral, including the following:
- Real estate
- Vehicles
- Equipment
- Liquid funds
Common examples of secured debts encompass mortgages, automotive loans and home equity credit facilities. In mortgage arrangements, real property secures the loan. Failure to meet payment obligations empowers the lender to initiate foreclosure proceedings and liquidate the property to recover the money.
Taking control of your finances
Understanding the difference between the two concepts is just the first step on your journey to financial freedom. With this knowledge, you can make wiser decisions about your debts and explore your options more confidently.
Many people face similar challenges, and there’s no shame in seeking help. If you’re feeling overwhelmed by your debts, consider contacting an experienced bankruptcy attorney who can guide you through your options.
