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What is unsecured debt?

Dealing with financial challenges is not easy and constantly worrying about your budget and how to keep up with your minimum monthly payments can be stressful. Being burdened by debt and wondering how to make ends meet is not an ideal situation, but the reality is that in today's tough economic times, many people struggle to manage their debts.

So, what does one do when they can't manage to pay all their debts? Of course, the essentials should be paid first, including housing, food, alimony, taxes and car payments. But after this, when one is staring at bills, what should they do? According to experts, it might be in the debtor's best interests to prioritize their personal debt.

In order to prioritize, it is very important to understand the difference between secured and unsecured debt. A secured debt is one that is backed by an asset. For example, a car loan is backed by the car itself. Therefore, when a payment is missed, the bank may be able to repossess the car and leave the owner without a way to commute to and from work. An unsecured debt, on the other hand, is not backed by anything and there is thus no asset to lose when repayment of the debt fails.

Paying secured debts first should be a debtor's priority. This doesn't mean one can become relaxed regarding their unsecured debts-making minimum payments to avoid ruining a credit score is very important. However, over time, the minimum payments add up, and often debtors end up paying more than they owed in the first place, and are still saddled with their debt and the threat of losing their property.

It may be possible to declare Chapter 7 bankruptcy to wipe out unsecured debts. Chapter 7 bankruptcy might also clear other debts, such as some taxes. An experienced attorney may be able to guide debtors through the process and advise them about which debts can be discharged through bankruptcy.

Source: Forbes, "3 debts to consider not paying off," Catey Hill, June 6, 2012