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Secured and Unsecured Debt

Many do have heard plenty about secured and unsecured debt but have little knowledge about the actual difference. Especially when dealing with personal finance or bankruptcy, it is important to evaluate how much debt you actually have. If you are in severe financial strain and think that only your bank accounts are subject to be lost, there is much more you could lose including property and other assets.

Differences between Secured and Unsecured Debt

personal financeUnsecured debt is any part of your personal finance obligation that is not related or secured by any property you own. The most common type of unsecured debt is that owed to credit cards. This is a perfect example because in the event that you do not make payments to the companies, your property cannot be seized because of it. Instead, an official order for payment must be made by means of a court order issued by a judge.

Other forms of unsecured debt can include delinquent utilities, medical bills, membership or legal fees, and similar unpaid balances. Any creditors or collection agencies that contact you for payment can never make claims about taking your property or home. In order to demand even a penny of payment from you, the party you owe will have to file a judgment with the appropriate court.

Secured debt can be much more serious than compared to unsecured debt. This is because collateral is directly involved with the arrangement. If you make a serious obligation for your personal finance and don’t make good on the payments, you are likely to lose that form of collateral. The most popular type of secured debt is a mortgage or home loan. When you commit to a mortgage, the house is up for repossession until it is completely paid in full with interest.

Another form of secured debt is a purchase that includes a written agreement that makes the transaction different from a typical credit card purchase. What this means is that the lender has a form of security that you will make payments, that being the purchase itself. In the event you miss too many payments or don’t pay at all, that company will come to repossess the item you promised to pay for.

Personal finance obligations like a loan with a finance company is also considered secured debt because collateral is often required to complete the approval process. For instance, in order to receive the loan, applicants have to put up furniture or other type of personal property. If payment eventually comes short and the loan is not repaid in full, the promised collateral will be seized to cover the loan.

How it Each Type Affects You

Knowing the difference between secured and unsecured debt will directly affect how you make payments. If you have credit card balances but also falling short on your mortgage payments, it is wise to take care of the home equity loan first before you lose your property. Before filing for bankruptcy or taking out yet another loan to manage your personal finance issues, assess all the different kinds of debt you have.

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