What is Unsecured Debt? | United Debt Settlement

Unsecured debt refers to a debt or similar financial obligation that is not backed by collateral, meaning the debt is not backed by property such as a house or automobile that can be seized in the event of non-payment or bankruptcy.

Debtors who fail to repay unsecured debt are not subject to loss of property unless and until the creditor files a lawsuit and obtains a court judgment. There are many forms of unsecured debt – in fact, most debts are unsecured – with the exceptions of home mortgages and auto loans.

Common forms of unsecured debt include credit cards, point of sale retail financing, personal installment loans, student loans, medical bills and personal lines of credit.

Types of Unsecured Debt

Unsecured debts are funds you borrow without providing any collateral. When a debt is secured, you provide collateral that the lender can leverage to make up for overdue balances and encourage repayment. Unlike a mortgage or auto loan, unsecured debts can be riskier for lenders, which is why they often have higher interest rates.

Common unsecured debt examples include:

Credit cards: One of the most common forms of unsecured debt with high interest rates and revolving balances that can grow quickly.

Personal loans: A lump sum of money that can be used for a variety of purposes, repaid in monthly installments over a set loan term, usually at a fixed interest rate.

Student loans: Federal or private loans to help pay for educational costs that have unique repayment terms.

Business loans: A lump sum of cash at a set interest rate with repayment terms that provide organizations with more time to pay for a large expense.

Medical debt: Balances accrued to pay for necessary hospital stays, prescriptions, surgeries and other health services.

Unsecured lines of credit: A revolving form of credit limit you can borrow against and repay up to a certain limit for access to cash as needed.

Peer-to-peer (P2P) loans: Personal loans through an online platform, funded by individual investors rather than a financial institution.

Characteristics of Unsecured Debt

Because the nature of unsecured debt is riskier to the lender (there isn’t any collateral for the lender to seize in the event of non-payment), interest rates on unsecured debt will be higher than interest rates associated with secured debt.

If a borrower of unsecured debt does not repay, the lender stands to lose the entire amount of the outstanding balance at the time of default. In the event of borrower bankruptcy, unsecured creditors have a general claim on the assets of the debtor, but only after any collateralized assets have been assigned to secured creditors. Consequently, unsecured creditors will often recover only a small fraction of their claims relative to what secured creditors recover.

Remember, because unsecured debt is not backed by any collateral, creditors will make lending decisions primarily on a potential borrower’s ability to re-pay as illustrated by the borrower’s credit score and profile.

Compared to secured debt, borrowers should anticipate higher interest rates at less favorable terms and lower borrowing limits with unsecured debt to compensate lenders for taking on the additional risk.

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When Is Unsecured Debt a Problem?

Unsecured debt becomes a challenge when it becomes difficult to make regular, on-time payments, and you’re unable to pay more than the minimum. It’s also a problem if it interferes with your ability to pay for essential expenses like utilities and your rent or mortgage, and you’re paying for one form of credit with another.

Warning signs that you’re struggling to manage unsecured debt include reliance on credit cards to pay for daily expenses, late or missed payments, collections activity and rising balances that you can’t lower because of high interest rates. For many, this can lead to stress, credit damage, strained relationships and a negative relationship with money. Luckily, there are debt relief options available that can help you get back on track and find a clear path to recovering your financial freedom.

What to Do About Unsecured Debt

If unsecured debt is impacting your financial stability, you can take steps toward improving your situation, such as reviewing your budget and prioritizing high-interest balances. You may also be eligible for hardship programs, debt consolidation, debt settlement or a debt management plan. With a reputable debt relief company, you can work with creditors to reduce balances, adjust repayment terms and determine the best way for you to regain confidence in your personal finances.

What Happens If I Don't Pay Back Unsecured Debt?

When an individual falls delinquent or stops paying unsecured debt, a number of things happen. Late payments on credit cards often incur fees, and payments that are more than sixty days late will usually get reported to the three major credit bureaus (Experian, Equifax and TransUnion), resulting in damage to a credit score and profile.

Credit score damage, in turn, leads to a diminished capacity to obtain additional credit at favorable terms – whether it be unsecured or secured debt. Creditors of unsecured debt can also turn the debt over to a collection agency who will (often aggressively) attempt to force repayment from the delinquent debtor.

Creditors can also file a complaint in State or Federal court and serve the debtor a copy of the complaint in an effort to obtain a court judgment. A debtor can answer the complaint and contest the lawsuit well before any judgment is ultimately entered.

What Happens if a Creditor Obtains a Judgment?

If a creditor is successful at obtaining a judgment against an individual who has left unsecured debt unpaid, a number of things can happen.

First of all, the individual may be subject to discussing under oath specific personal financial details related to income, assets and liabilities. The creditor can then pursue wage garnishment, as well as bank account seizure, along with the attachment and sale of any real estate and/or personal property. Finally, in the event of a court-ordered judgment, wage garnishment and liens placed on any personal assets remain very real possibilities until the debt is repaid.

If you’re interested in exploring debt relief options to avoid more serious consequences, don’t hesitate. Contact us today to talk about debt settlement options near you that can get you back in control.