Debt, when used properly, can be a valuable tool for many people to build their financial health and grow their own worth. However, at the Law Office of Kim Covington, we see many clients who unknowingly place themselves in a compromised financial position because they are unfamiliar with the two types of debt, secured and unsecured, and how each type is handled by creditors.

Secured debts have a promise of collateral behind them, making them more attractive to many lenders. If a debtor fails to pay as agreed on a secured debt, the creditor may retake ownership of the collateral and walk away with varying levels of loss. Home mortgages and auto loans are two common types of secured debts often used around the nation. However, other types of property, such as jewelry, furniture, and tools are commonly purchased using this type of agreement. According to the U.S. Census Bureau, households across the nation held a median secured debt of $91,000 in 2011, up from $69,749 in 2000.

In contrast, unsecured debts do not have any assets to back them. This means that creditors agree to provide financing only on a person’s promise that they will repay the money in a certain amount of time, according to an agreement. If debtors fail to pay on the loan, they do not lose any assets, and creditors do not have anything to sell to try to make up their losses. However, debtors’ credit ratings may be adversely affected in this situation. Some of the most common unsecured debts in the nation include student loans, personal loans, credit cards and unpaid medical bills.

It is important for consumers to become knowledgeable about which types of debt work best for their individual circumstances, and how each will be handled if they choose to file for bankruptcy. For more information about this subject, please visit our web page.