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What is Unsecured Debt?

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In a Nutshell

Unsecured debt is not tied to any property (collateral) and includes credit cards and medical debt. Chapter 7 and Chapter 13 cases eliminate most unsecured debts.

Written by Attorney Andrea Wimmer.  
Updated September 10, 2020


Unsecured debt is money you owe to a creditor that is not connected to any specific piece of property. That bank or credit card company is called an unsecured creditor. There are two main differences between unsecured and secured loans.  

Common Types Of Unsecured Debt

Credit cards: This is different from debit cards (even though they may have a MasterCard or Visa symbol) because debit cards are connected to your bank account, so you’re spending your own money. With credit cards, you’re using borrowed money to make purchases. The interest rate on unsecured credit in the form of credit card debt varies based on the borrower’s credit report. 

Personal loans: These are loans you get usually from your bank or credit union. They’re sometimes called signature loans because as long as you have good credit and a bank account with them, a signature is often all that’s needed to get one of these loans.

Student loans: As of 2020, 44.7 million borrowers owe a combined total of $1.6 trillion in student loans. It’s the second highest type of consumer debt, second only to mortgages.[1]

Other Examples Of Unsecured Debt

  • medical debt

  • old utility bills

  • old rent and lease payments

  • old cell phone bills

  • deficiency on auto loan after repossession

  • child support

  • unsecured line of credit

  • most tax debts

Compare To Common Types Of Secured Loans

The most common types of secured loans for consumers are car loans, home loans and secured credit cards. Secured credit cards are a good way to build good credit if your credit history is not ideal. Here, the collateral for the debt is your own money, which you deposit with the bank. You can then use the secured card like any other credit card. 

Unsecured creditors have fewer options in case of a payment default

Unsecured creditors can only take your money or property after they get a judgment against you. For that, they’ll have to hire a lawyer and file a lawsuit against you.  If you stop making your monthly payments on this type of debt, you’ll get calls and letters. After a while, the calls and letters will be from a debt buyer, debt collector, or collection agency. But, unsecured creditors (and their collection agencies) can’t take any property away from you. That’s only possible for secured debts, like car loans. 

If you miss one or more monthly payments on a secured loan, the bank can take the property that secures the loan. That property is called the “collateral.” For a car loan, the car is the collateral. For home loans, real estate secures the debt. Because the bank will recover at least the property, secured loans are less risk for the bank. 

Unsecured loans often have a higher interest rate

Of course, the borrower’s creditworthiness as determined by their FICO score and credit history plays a big role in determining the interest rate for any type of debt. If you have good credit, it suggests that you’re managing your personal finances well. Since that means you’re less risk than someone with a low credit score, you’ll be rewarded with a lower interest rate. 

Still, unsecured loans have a higher interest rate than secured loans because the bank takes more of a risk. In the case of secured loans - like home loans and auto loans - if the borrower defaults on the repayment terms of the loan, the bank can either foreclose on or repossess the property. Unsecured loans can’t. 

Since secured loans have a lower interest rate than credit cards, home equity lines of credit are a popular method of debt management through debt consolidation. Using your home equity as collateral, you pay off your high interest rate credit card debts in one fell swoop. 

What To Do If You Have Too Much Unsecured Debt

Since being debt-free is almost considered a “bad” thing by the credit bureaus, everyone usually has at least one credit card or other type of debt. Of course, when life happens and unexpected expenses, like medical bills, start piling up, it can be tough to keep up with all the minimum monthly payments. 

If you’re worried that your unsecured creditors are going to start debt collection efforts or they already have a garnishment order against you, know that you have options for debt relief. 

Consider Free Credit Counseling

Credit counseling will give you the opportunity to get a comprehensive overview of your situation and your options. If you don’t know that to do, signing up for a credit counseling session with an accredited nonprofit provider in your area is the best place to start! The credit counselor will review your situation and make a recommendation on how to best deal with your debt. Their recommendations can include trying a debt settlement, debt consolidation, and filing bankruptcy. 

Bankruptcy is the ultimate form of debt relief. It’s designed to give the honest but unfortunate debtor a way to hit the reset button and start fresh. 

Eliminating Unsecured Debts With Bankruptcy

Eliminating unsecured debt is one of the primary benefits individuals receive from a bankruptcy filing. Once you meet all legal requirements, your debt will be erased by the bankruptcy discharge. In a Chapter 7 bankruptcy, the filer receives a discharge 3 - 4 months after filing

Unsecured Debt That Can’t Be Discharged In Bankruptcy

Almost all types of unsecured debts are eliminated when the discharge is entered. But, not all of them are. You still have to list them on your bankruptcy forms, but they’ll survive the discharge. Some of the most common non-dischargeable debts are: 

Student Loans

Student loans can’t be discharged in bankruptcy unless the filer can show the court, through a separate adversary proceeding, that it would be an undue hardship for them not to have the student loans eliminated. Most debtors have to pay student loans. When you get rid of the rest of your unsecured debt, student loan payments may not be as difficult to make. You may also qualify for other student loan relief. The government has several options available for people who can’t pay their student loans.

Personal Income Taxes

Only tax debts that are more than three years old and meet all of the requirements can be eliminated in a Chapter 7 bankruptcy. The discharge analysis can get very complicated very quickly, so if you have a lot of tax debts it’s best to speak with a bankruptcy attorney before filing your case. Otherwise, you risk not being able to eliminate a debt that you could have discharged if you had waited a few months before filing.   

Domestic Support Obligations

Domestic support obligations include alimony and child support. You can’t get rid of alimony or child support obligations by filing a bankruptcy case. Filing bankruptcy does not forgive unpaid alimony or child support.

How is unsecured debt treated in Chapter 13 bankruptcy?

In a Chapter 13 case, you file a repayment plan and make one affordable monthly payment. Unsecured creditors receive a percentage of what they’re owed from the bankruptcy trustee. General unsecured creditors rarely receive payment for all the unsecured debt you owe. 

A benefit of Chapter 13 bankruptcy is that it allows you to eliminate certain non-dischargeable debts by paying them off through your Chapter 13 bankruptcy plan. Both tax debts and domestic support obligations are considered priority debts, which allows you to treat them differently from all other unsecured debts and pay them off. 

When you complete your Chapter 13 plan, the remaining balances owed to unsecured creditors are discharged, just like in a Chapter 7. Since you’ve paid off all non-dischargeable priority debts, you’ll essentially be debt-free even though only part of your unsecured debt was discharged. 

Filing bankruptcy on your own

If you’re struggling to make ends meet you may wonder how you can ever be able to afford bankruptcy. The good news is, you don’t have to have a lawyer to file for bankruptcy protection. And, if you’re eligible, you can use Upsolve’s free web tool to prepare your bankruptcy forms


Sources:

  1. EducationData.org. (2020, April). Student Loan Debt Statistics. Retrieved September 10, 2020, from https://educationdata.org/student-loan-debt-statistics/

Written By:

Attorney Andrea Wimmer

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Andrea practiced exclusively as a bankruptcy attorney in consumer Chapter 7 and Chapter 13 cases for more than 10 years before joining Upsolve, first as a contributing writer and editor and ultimately joining the team as Managing Editor. While in private practice, Andrea handled... read more about Attorney Andrea Wimmer

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