What is Unsecured Debt?
Unsecured debt refers to a debt or similar financial obligation that is not collaterally backed – 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.
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.
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.
These collection remedies are governed by state law and will vary. However, it would be foolish to think that skipping out on repaying unsecured debt does not come with real consequences. At the very least, a damaged credit score and late fees are a virtual certainty. Then there’s the issue of collection agencies getting aggressive with you in an effort to force you into repayment.
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.
Handling my business debt was not something I looked forward to
Handling my business debt was not something I looked forward to. But United Settlement was so patient with my questions and helped me figure out how to handle my debt as a small business owner. I qualified...
I didn't even know what type of interest rates there were and how those affected my debt overall
When I contacted United Settlement, I didn't even know what type of interest rates there were and how those affected my debt overall. So, when I went to go buy a new house, I was shocked to find out that...
Debt settlement is what we signed up for when we were interested in using United Settlement
Debt settlement is what we signed up for when we were interested in using United Settlement. We needed a company to negotiate on our behalf to help us reduce the total amount of debt we owed, and we were...
I had no idea that I could lower my credit card interest rates. But when I contacted United Settlement, they explained to me that I could negotiate my interest rates down lower along with my payoff balance....
If you have ever had an unmanageable amount of credit card debt
If you have ever had an unmanageable amount of credit card debt, you know how ridiculous it is to try to pay it off. In my situation, I did not want to wait until the last moment to get this debt under...
Medical debt is damaging to your long-term credit
Medical debt is damaging to your long-term credit. That is what we were dedicated to managing our debt as soon as we got our medical bills from an unexpected surgery that our insurance did not cover. I...
Finding a good alternative to business debt relief is far from easy
Finding a good alternative to business debt relief is far from easy. As a company, we have spent years trying to find a good solution to our business’ debt, because if we can get it out of the way we...
I had no clue that a debt consulting company could provide guidance
I had no clue that a debt consulting company could provide guidance and what type of loans you should take out. I was thrilled by the communication I had with United Settlement. They did not hesitate to...
Buying a new vehicle should not stress you out to the point that you cry every night to go to sleep
Buying a new vehicle should not stress you out to the point that you cry every night to go to sleep. But that was the point I was at before I contacted United Settlement. These guys were professionals at...
I knew I needed to file bankruptcy before I even contacted the team at United Settlement
I knew I needed to file bankruptcy before I even contacted the team at United Settlement. My biggest issue was how to file and also what type of bankruptcy I should file. A lot of people do not know that...
Who would have thought that auto loan debt can take such a toll on a family
Who would have thought that auto loan debt can take such a toll on a family? Well, we discovered how that could happen when our family bought two new vehicles. We thought we could afford the payments, but...
Why go bankrupt when you do not have to?
Why go bankrupt when you do not have to? That was my thinking when I decided to hire United Settlement. I wanted them to help me get out from underneath my credit card and auto loan debt. They were very...
Who knew that you could get credit card debt relief
Who knew that you could get credit card debt relief just by reaching out to a credit card consolidation company? I did not. But I had a friend recommend United Settlement to help me get through my debt...
We had a revolving credit card debt that just wouldn’t quit
We had a revolving credit card debt that just wouldn’t quit. This in turn made it difficult to try to buy a house. Our credit card debt literally held us back from moving forward in life. But our goal...
There comes a time when you realize you need help with your debt consolidation
There comes a time when you realize you need help with your debt consolidation. And that time came for me last year. I contacted United Settlement to help me manage my debt issues. They were friendly and...
Small business loan debt was crippling our company.
Small business loan debt was crippling our company. We have spent many years building our business, but we had to take out several loans to get through a slow period. Fortunately, those loans helped, but...
If you have ever run a business before, you know how quickly you can get into debt
If you have ever run a business before, you know how quickly you can get into debt. That’s right, you can be trying to live your best life and end up in a situation you cannot get yourself out of. That...
Our credit card interest rates were astronomical
Our credit card debt was not really that bad, but our credit card interest rates were astronomical, which meant we could not get out from under our debt as quickly as we would have liked. We used United...
I had no idea that I would qualify for business debt consolidation loans
I had no idea that I would qualify for business debt consolidation loans. But United Settlement walked me through what that process was like and gave me insight into how to manage my future debt so that...
The last thing I wanted to do is file for business bankruptcy
The last thing I wanted to do is file for business bankruptcy, but that was before I knew how common it was and how little it actually affected my personal credit. United Settlement informed me of that...