Secured Debt

A secured debt is a financial obligation in which the borrower pledges an asset, known as collateral, to the lender as a guarantee for the loan. Common examples of secured debts include mortgages, where the house serves as collateral, and car loans, where the vehicle is the collateral. Other types of secured debts can include home equity loans, where the borrower’s equity in their home is the collateral, and secured credit cards, where the borrower’s cash deposit serves as collateral.
The collateral is a form of protection for the lender. When the borrower fails to make payments as agreed, the lender has the legal right to seize the collateral through foreclosure or repossession to recover the outstanding debt. This lower risk for the lender often results in secured debts having lower interest rates than unsecured debts.
In a bankruptcy proceeding, secured debts are treated differently than unsecured debts. Suppose a debtor wants to keep the collateral securing a debt. In that case, they must continue making loan payments or negotiate with the lender to reaffirm the debt, which means that the debtor agrees to continue paying the debt even after the bankruptcy. If the debtor cannot afford the payments or does not wish to keep the collateral, they may choose to surrender the asset to the lender.
Secured creditors will have priority over unsecured creditors in bankruptcy, meaning they are more likely to recover some or all of the money owed. This knowledge empowers debtors considering bankruptcy or facing financial difficulties, as understanding the implications of secured debts is crucial for making informed decisions.