Understand the difference between unsecured and secured debt

Understand the difference between unsecured and secured debt

One may think that all debt is equal and must be repaid to the creditors at the same pace and the same amount, but this is not true. Arizona residents may be surprised to hear that debt can be of two kinds, secured and unsecured, and both are treated differently, both by creditors and during bankruptcy proceedings.

Credit cards and student loans are examples or unsecured debt. This debt is incurred when one party lends another money without a lien-that means there is nothing that a creditor can directly repossess if the debtor does not pay back the debt. However, if the creditor sues the debtor, then they might be able to get a lien against something, usually wages, and this is generally why wage garnishment takes place.

A secured debt, on the other hand, is a debt that is secured by placing a lien on something-a home mortgage is secured against the home and a car loan against the car. This means that if the debtor does not pay their debt back, the creditor can repossess those assets.

In order to avoid asset forfeiture, one of the things an Arizona resident going through a financially difficult time can do is pay the secured debt before the unsecured one-car payment before credit card payment. Another way to considerably cut back on financial problems is declaring bankruptcy, which would wipe out most unsecured debt and allow Arizona residents the option to avoid asset forfeiture on a number of items.

Source: Fox Business, "What is unsecured debt?," Dave Ramsey, Aug. 1, 2011

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