Different debts require different approaches

Understanding the different types of debt is essential to effective debt management. This knowledge can help you negotiate with creditors and explore options for extracting yourself from trouble such as refinancing or consolidating your debt when the time is right. Further, in the event you can’t make your payments, it is crucial to understand what the consequences are for each type of debt.

Secured debt

Secured debt is exactly what it says, behind it there is some concrete, physical piece of property that the lender can seize to help pay off your debt. More than likely if you have ever had a mortgage or car loan, you’ve had secured debt. Typically, the interest rates on secured debt is less than on unsecured debt because the lender assumes less risk, that is to say, if you default on your loan, the lender can simply repossess the property.

Unsecured debt

Unsecured debt, by contrast, isn’t attached to any collateral. Typically, unless your credit is sparkling, unsecured debt will come with a much higher interest rate, sometimes as high as 35% but some unscrupulous sources try to charge as much as 99% for people who are really desperate. In all likelihood a company seeking payment for an unsecured debt has little in the way of recourse other than to put a bad mark your credit rating and/or take you to court. However, most companies will choose not to incur costly court fees if the gain does not exceed the effort.

Should you be pushed to bankruptcy, the court will mete out different resolutions depending on whether the debt is unsecured or secured. While secured debt often will lead to court-sanctioned repossession of one’s property, unsecured debt is trickier. As a company doesn’t have claim to anything other than money, they have little choice but to hope the bankruptcy court will include any unsecured debt in the bankruptcy decision. A lender can pursue avenues in which they can dispute a debt as unsecured, however, should the court rule against them, they cannot collect on the debt at all.

Regardless, bankruptcy is a decision not to be taken lightly and it should not be attempted by someone who doesn’t know what they are doing, but rather they should consult a lawyer trained and equipped to deal with such matters. Bankruptcy is a very convoluted and complicated process. Making a mistake can be the difference between the result you’re seeking and financial disaster.

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