Simply put, unsecured debt is any type of you debt you have that isn't backed by collateral. The most common types of unsecured debts are credit card debts, medical bills, and personal loans. If you don't pay these debts (called defaulting), the creditor or lender doesn't have anything it can come collect to help repay the debt. By contrast, secured debt is backed by collateral. The two most common types of secured debt are mortgages and car loans. If you default on your home or car loan, the lender can seize the collateral (the home or car), to help repay your debt.
Written by Attorney Amelia Niemi.
Updated June 15, 2023
What Is Unsecured Debt?
There are two main types of debt: unsecured and secured. Unsecured debt is debt that isn't backed by collateral or property. Here are some common examples of unsecured debts:
Credit card debt
How Does Unsecured Debt Differ From Secured Debt?
Secured debt is backed by collateral or property. Two common types of secured debt are auto loans and mortgages. With an auto loan the car serves as the collateral backing the loan. With mortgages, your home is the collateral that secured or backs the loan.
You may have also heard of secured credit cards. These differ from other credit cards in that they are secured by a deposit. Secured credit cards are a great way to build or rebuild your credit because they are less risky to the lender since there is a deposit backing the card.
One of the major differences between secured and unsecured debt is what happens if the borrower defaults (have several missed payments) the debt. If you default on secured debt, your risk losing the property that backs the loan. For home loans and other real estate, this process is called foreclosure. For car loans, this process is known as repossession.
If you default on unsecured loans, there are still serious consequences. The default will be recorded on your credit report and lower your credit score, which can make it harder for you to get approved for credit cards and loans in the future or to get a card or loan with a good interest rate. You may also have to deal with debt collection agencies
Unsecured Debt Can Become Secured Debt
There are two ways unsecured debt can become secured debt:
The creditor sues you and wins a court judgment
You consolidate your debt in certain ways
How a Court Judgment Affects Unsecured Debt
If you get sued for not paying on an unsecured debt and creditor suing you wins, the judge can issue a court judgment against you. This judgment can turn into a lien on your home, car, or bank account. In addition to negatively affecting your credit score, a lien can make it more difficult to sell your property. If you get sued, don't despair! You can fight and win the lawsuit against you.
If a creditor already has a judgement against you, contact them to see if you can negotiate a debt settlement arrangement.
How Debt Consolidation May Affect Unsecured Debt
Some forms of debt consolidation turn unsecured debt into secured debt. For example, homeowners take out a home equity loan (also called a line of credit) to pay off other, higher interest rate debts. Since the equity loan is backed by collateral (the home), the loan often comes with lower interest rates than debts like credit card debt. This can save these borrowers money in the long run.
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Bankruptcy and Unsecured Debt: What You Need To Know
In bankruptcy, there are two categories for unsecured debts:
Priority debts: These include back taxes and court-ordered support such as child support and alimony. You can't get rid of these debts in bankruptcy. In Chapter 7 and Chapter 13, you must pay priority unsecured debts first and in full, whenever possible.
Nonpriority debts: These include credit card debt, student loan debt, medical debt, and any other past-due bills like utility bills. You can file Chapter 7 or Chapter 13 bankruptcy to get unsecured debt discharged, but this looks different depending on which chapter you file.
Is Unsecured Debt Discharged in Chapter 7?
If you own anything that isn't protected by bankruptcy exemptions, the trustee assigned to your case can sell the items (called nonexempt assets) and use the proceeds to pay your creditors. Most people who file for Chapter 7 don’t actually have enough non-exempt assets to justify a sale. That means the majority of people filing Chapter 7 get rid of their unsecured debts, usually within 4–6 months.
That said, though student loans are nonpriority unsecured debts, they are treated differently than other types of unsecured debt in bankruptcy.
Do Student Loans Get Discharged in Bankruptcy?
You can get your student loans erased in bankruptcy, but doing so requires a little extra work. You must file an adversary proceeding after you file your bankruptcy case and then prove that repaying your loans is causing undue hardship. You prove this by passing the Brunner test. This is more paperwork, but if you qualify, it's worth trying... and Upsolve may be able to help! Start out free screener now to see if you're eligible to have your student loans discharged in bankruptcy. Upsolve is a nonprofit and our help is always free.
Is Unsecured Debt Discharged in Chapter 13?
Chapter 13 operates a little differently than Chapter 7. The main difference is that Chapter 13 requires a 3–5 year repayment plan. Chapter 13 is usually better suited for filers who own a home or other property (that the filer wants to keep) that isn't covered by exemptions. Filers who successfully follow their Chapter 13 plan receive a discharge at the end of the three or five years. This means any remaining unsecured, nonpriority debt is erased.
Being in the repayment plan protects filers from wage garnishment and debt collector contact. These rules give people who file bankruptcy some breathing room while they get their personal finances in order.
Whatever kind of debt you have, it can be exhausting if you have a lot of it! Thankfully, there are several forms of debt relief available! If you feel like you’re drowning in unsecured debt, check out Upsolve’s free web app to see if Chapter 7 bankruptcy is right for you.