Unsecured Debt: What It Is and What Happens if You Don't Repay It?

What Is Unsecured Debt?

Unsecured debt is money you owe that isn’t tied to any specific property. That means if you don’t pay, the creditor can’t automatically take something you own to get their money back.

🏦 Banks, lenders, and credit card companies that loan you this kind of money are called unsecured creditors.

Because unsecured debts aren’t backed by property, they’re often easier to erase (or discharge) if you file for bankruptcy.

If you’re struggling to stay afloat, you may be able to file bankruptcy for free without a lawyer using Upsolve’s online filing tool. Upsolve is a nonprofit that helps eligible folks prepare their bankruptcy forms and start fresh — at no cost. (Learn more about Upsolve.)

Common Types of Unsecured Debts

The most common types of unsecured debts are:

• Credit cards

• Personal loans

• Medical debt

• Old utility bills

• Old rent and lease payments

• Old cellphone bills

• Deficiency balances on auto loans after car repossession

• Child support

• Unsecured lines of credit

• Most tax debts

Student loans are also considered unsecured debts. But they work a little differently from other debts on this list. When you take out a student loan, you usually have to sign a document called a promissory note, which is a legal promise to repay the loan.

Even though student loans aren't tied to property like a house or car, they come with special rules that can make them harder to wipe out in bankruptcy. Still, you can discharge federal student loans if you meet certain requirements.

How Are Secured and Unsecured Debts Different?

When you borrow money, the loan will either be secured or unsecured. The big difference is whether the loan is tied to something valuable you own, called collateral.

Secured Debts Are Tied to Property

Secured debts are backed by collateral. That means the lender has a legal right to take the property if you don’t pay.

Common examples of secured debts include:

• Car loans (the car is the collateral)

• Home loans or mortgages (the house or real estate is the collateral)

• Secured credit cards (the collateral is a cash deposit you make)

If you miss payments on a secured debt, the lender can repossess the car, foreclose on the home, or keep the money you put down.

💡 Because the lender has a way to recover their money, secured debts usually have lower interest rates.

Unsecured Debts Aren't Tied to Property

Unsecured debts don’t have any property backing them up. If you don’t pay, the creditor can't just take something from you. For example, if you fall behind on a credit card payment, the credit card company can't come and take the things you purchased with the card.

If you fall behind on unsecured debts, creditors will usually start by calling you and sending letters. If the debt isn’t paid, they can sue you. But they must win a court case and get a judgment before they can garnish your wages or freeze your bank account.

Because unsecured debts are riskier for lenders, they often come with higher interest rates than secured debts.

What Happens if You Don’t Pay a Loan Back? 

Missing one payment on a loan isn’t the end of the world, but if you start to get far behind on unsecured loan payments, there can be serious consequences.

Here’s what typically happens first:

• Your credit score may drop. This can make it harder or more expensive to get new credit down the road, but scores can recover over time with a positive payment history.

• Late fees and higher interest charges can add up. Even small fees can grow quickly, making it tougher to catch up.

• You might lose any grace period your lender offers. A grace period is extra time after your due date to make a payment without extra charges.

• Overdraft fees can happen with automatic payments. If your account balance is low, your bank may charge a fee when a payment goes through.

• The account could move from delinquency to default.

  • Delinquency means you’ve missed one or more payments.

  • Default means the account has been unpaid for a longer time (often several months), and the lender may send it to collections or even sue you to try to recover the debt.

If you default on the loan, even more serious things can happen. We cover those next.

What Can Happen if You Default on an Unsecured Loan?

If an account goes into default — meaning you haven’t made payments for several months — the lender may take more serious steps to collect the money.

Here are some of the possible consequences:

• Collections calls and letters: The lender may turn your account over to an in-house collections department or hire an outside agency. These collectors will usually call and send letters asking for payment. They must follow certain rules under the Fair Debt Collection Practices Act (FDCPA), which means they can’t harass you or share details of your debt with others.

• Debt collection lawsuit: In some cases, the creditor or collection agency may sue you in court. If you don’t respond to the lawsuit, the court will likely issue a judgment in the creditor’s favor by default.

• Wage garnishment: If a creditor wins a judgment, they may be able to take money directly from your paycheck until the debt is paid. State laws set limits on how much they can take.

• Bank account levy: In certain situations, a judgment can also allow a creditor to withdraw funds directly from your bank account.

• Property liens: A judgment may also result in a lien on your property, which can affect your ability to sell or refinance it later.

Defaulting on an unsecured loan can also leave a lasting mark on your credit report. 

🗓️ Judgments can remain for up to 10 years in some states, and late payment history usually stays for seven years.

While these consequences can feel intimidating, many people are able to work out payment arrangements, settle their debts, or explore other solutions — including bankruptcy — to stop collections and get a fresh start.

What Should You Do if You’re at Risk of Defaulting?

Unsecured debt like credit cards, medical bills, and personal loans can add up quickly, especially when life throws unexpected expenses your way. If you're finding it hard to keep up with minimum payments or getting calls from debt collectors, you're not alone — you have options.

Here are ways to manage your debt, protect your income, and get a fresh start if you need one:

• Contact the lender directly

• Get a free consultation with a nonprofit credit counselor to discuss your options

• Refinance the loan or get a new loan

• File bankruptcy

Contact the Lender Directly 

A great first move is to contact your lender directly. Explain your situation and ask if they can help. Some lenders will let you skip one or more payments if you’re experiencing financial hardship. You can also ask if it’s possible to lower the monthly payment, waive late fees, or temporarily reduce interest rates.

You’ll usually have more options if you contact the lender at the first sign of difficulty rather than waiting until you’re deep in default.

Get a Free Credit Counseling Session

One option many people explore is working with a nonprofit credit counseling agency. A credit counselor can help you review your full financial situation and walk you through your options. This could include:

• Simple budgeting to better manage your finances

• Setting up a debt management plan

• Negotiating a debt settlement agreement

• Consolidating your debts

• Filing bankruptcy

If you're not sure where to start, signing up for a free credit counseling session with an accredited nonprofit such as Cambridge Credit Counseling can be a great first step. Cambridge is a nonprofit with nationally certified credit counselors who can help create a personalized action plan for you.

Note that if you sign up with Cambridge via Upsolve, we earn a small commission.

Research Refinancing or Debt Consolidation

If a debt management plan doesn’t feel like the right fit, another option some people explore is refinancing or consolidating their unsecured debts. This means taking out a new loan — ideally with better terms — to pay off your existing debts.

Debt consolidation can sometimes help you:

• Get a lower interest rate

• Lock in better repayment terms

• Reduce your monthly payment amount

• Make budgeting easier by combining multiple payments into one

People often use this approach for high-interest debts like credit cards.

Common ways to consolidate debt include:

• Personal loan: An unsecured loan you use to pay off your other debts.

• Credit card balance transfer: Moving your balances to a credit card with a low or 0% introductory interest rate.

• Home equity line of credit (HELOC): A loan that uses your home as collateral. 

⚠️ A HELOC may help you get a lower interest rate, but it also turns your unsecured debt into secured debt, which carries the risk of losing your home if you can’t make the payments.

File Bankruptcy

If you’re taking on new loans just to cover payments on the debts you already have, it could be a sign that your financial situation needs a bigger solution. For many people, that solution is Chapter 7 bankruptcy.

Bankruptcy is a legal process that can erase — or “discharge” — most types of unsecured debt. This includes credit card balances, medical bills, payday loans, personal loans, and more.

One of the most powerful features of bankruptcy is the automatic stay. This court order goes into effect as soon as you file and stops most debt collection activities right away — including phone calls, wage garnishments, and even pending lawsuits.

If you’re wondering whether Chapter 7 bankruptcy might work for you, you can take Upsolve’s two-minute screener to see if you qualify to use our free filing tool.

How To Eliminate Unsecured Debts With Bankruptcy

When unsecured debts like credit cards, medical bills, or personal loans feel impossible to manage, Chapter 7 bankruptcy can offer real relief. 

In most cases, it takes only a few months to get the court order — called a discharge — that wipes those debts away and gives you a chance to rebuild.

Most unsecured debts are eliminated in bankruptcy. This includes things like:

• Credit card balances

• Personal loans

• Medical bills

• Old utility bills

• Some types of personal judgments

Once these debts are discharged, you no longer have any legal obligation to pay them. It’s important to know that some unsecured debts aren’t automatically forgiven in Chapter 7.

Unsecured Debts That Might Not Be Discharged

You have to list all your debts on your bankruptcy forms, but some debts can't be discharged in Chapter 7 bankruptcy, including recent income tax debt and domestic support obligations like child support and alimony.

Student loans are a special case. They aren’t automatically discharged like other unsecured debts, but sometimes federal student loans can be discharged in bankruptcy.

Student Loans

Most student loans aren't automatically discharged in bankruptcy. You can only eliminate them if you file a separate lawsuit in your bankruptcy case, called an adversary proceeding. You also have to prove that paying them would cause undue hardship.

This process can be difficult, but some people qualify. Even if your student loans aren't discharged, wiping out other debts can make it easier to manage your student loan payments. You might also qualify for income-driven repayment plans or other federal relief options.

Recent Income Taxes

Some income tax debts can be discharged in bankruptcy, but only if they meet very specific rules. Usually, the tax debt must be at least three years old, and you must have filed your tax returns properly.

Figuring out whether your tax debt qualifies can get complicated. Many people choose to talk with a bankruptcy attorney if they owe a lot in taxes, just to make sure they’re filing at the right time. Upsolve can help connect you with a local attorney for a free bankruptcy consultation.

Domestic Support Obligations

Debts like child support and alimony can’t be wiped out in bankruptcy. Filing bankruptcy also doesn’t erase unpaid child support or alimony you already owe. These debts have special protection under the law and must be paid in full.

How Is Unsecured Debt Treated in Chapter 13 Bankruptcy?

Unlike Chapter 7 bankruptcy, which wipes out most debts in just a few months, Chapter 13 takes a longer-term approach. Instead of erasing your debts right away, you commit to a repayment plan that lasts 3–5 years.

In a Chapter 13 bankruptcy, you propose a plan to repay some or all of your debts based on what you can afford. You’ll make one monthly payment to a bankruptcy trustee, who then distributes that money to your creditors.

Certain debts, like child support and recent taxes, must be paid in full during your plan. Others — like credit cards, medical bills, and personal loans — may only receive partial payments, or nothing at all.