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Understanding secured and unsecured debt

On Behalf of | Sep 9, 2020 | Bankruptcy

A consumer struggling to keep up with their bills may at times fall further into debt despite their best intentions and efforts. Depending on the circumstances, a consumer bankruptcy may offer the help a person needs to get out from under debt and set forth on a fresh financial path.

When choosing between a Chapter 7 and a Chapter 13 bankruptcy plan, a consumer should learn about the difference between types of debt.

Understanding secured debt

Examples of secured debt include automobile loans and home mortgages. Bankrate explains these forms of debt are called secured because they are directly linked to tangible assets that may be repossessed if the consumer fails to make payments. In a Chapter 7 bankruptcy, these assets may be seized to help repay the creditors. This does not occur in a Chapter 13 bankruptcy.

Understanding unsecured debt

According to The Motley Fool, an unsecured debt has no relation to any specific asset. No repossession may occur should the consumer miss or fall behind on their payments. Examples of unsecured debt include medical bills and most credit cards. A Chapter 7 bankruptcy discharges a person’s unsecured debts with no need for repayment at any time.

Interest rate differences

Because a secured debt offers a creditor some assurance of repayment or recourse should a consumer default on the credit, the creditor may extend lower interest rates to the consumer. Unsecured debts generally come with less favorable terms and higher interest rates in exchange for the greater risk accepted by the creditor. A consumer’s credit score and history may also factor into the interest rate they receive on these accounts.

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