Debt - Secured Vs. Unsecured
Secured Versus Unsecured Debt - When You Should Pay Them
Most people have some form of debt. Whether it's mortgages, car loans or medical benefits, debt can be a good thing. However, if you are in serious debt, it's important to understand the differences between secured and unsecured debt.
A secured debt is backed up by an asset that you own. When you apply for a loan, the creditor places a lien on the asset. For example, when you buy a home the mortgage is the debt, and the lender places a lien on the property itself. If you fail to pay the debt on time, they have the right to take the property (known as collateral).
Most debts, however, are unsecured. This means your assets are not collaterized, and the creditors do not have the right to take your property. The process for unsecured debt is as follows: first, the creditors will try to work directly with you; secondly, they will employ a debt collector who will be more aggressive in collecting your debt; and thirdly, the creditors will work with the courts and obtain permission to collect from you. The court can allow creditors to place a lien on your assets (making it a secured debt) or take the asset away from you outright. Courts also allow creditors to garnish your wages, which means they can take part of your pay directly from your employer. Garnishing wages is legal in most states, but you should check your own state law to make sure.
Between the two, secured debts tend to be more serious and should be paid off first. There are times, however, when an unsecured debt can be more important. The following unsecured debts should be at the top of your list to pay: child support, federal student loans, federal and state income taxes, property taxes, health insurance and medical bills. Failure to pay these debts can land you in bankruptcy and/or prison.
As you can see, there are hundreds of debts, though they all all into two categories: secured or unsecured. As a general rule, pay the secured debts first as your creditors have the right to your assets. Then, focus on the unsecured debts outlined above and move the rest of the debts to the lower part of your list. By contacting each creditor and explaining the situation, you may be able to negotiate a payment plan that both sides can live with.
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