Secured Debt vs. Unsecured Debt

The difference between secured debt and unsecured debt.

Secured Debt

A secured debt is a debt that is backed by pledged collateral, a lien, a mortgage, or other instruments such as a properly recorded judgment.

Clients often ask what is a secured debt. Think of it this way. When you purchased your home you pledged your home as collateral to the mortgage lender. When you purchased your car, you may have a lien on the title by a lender. Those creditors are secured. If I do not pay the debt the creditor can take my home or car. In the event of default, a secured creditor will typically have first rights to the assets that secures its loan to the debtor. In home mortgages or auto loans, the bank or lender has priority for the amount owed on the home or car to satisfy the debt that is secured by that particular asset.

In the business context, there may be certain secured transactions that involve the pledging of collateral or proceeds.  If a lender gives a business loan, the lender may ask that certain property be “pledged” and that pledge is then recorded as a lien or other instrument proving priority. 

In the event of a sale of that pledged property, such as inventory, a lien will typically attach to the proceeds of that sale thus ensuring the security of the debt. A secured loan will typically have a lower interest rate because the lender has assets that are specifically pledged and that they are entitled to in the event of default. This lowers the risk from the lender’s standpoint and may result in lower interest rates being charged for the loan.

Secured debts will typically provide a lender with more security in the loan given because it has a specific recourse to collect on in the event of default. In the bankruptcy context, secured debts are treated differently than unsecured debts, and the priorities of the creditors with respect to the debtor’s assets are different as well.

Furthermore, if a debtor wishes to keep certain pledged or secured collateral then there will be additional considerations and issues presented in the bankruptcy proceeding.

Unsecured Debt

An unsecured debt is the opposite of a secured debt, the lender has no specific recourse to any assets of the debtor.

Utility bills and credit cards are some of the most common unsecured debts that individual’s encounter. If an individual has a medical bill or credit card that they do not pay, the hospital or credit card issuer does not have a specific asset(s) that secure its loan. The credit card issuer is on its own in recovery from whatever assets the debtor may have and will usually be later in line to collect compared to creditors that have a secured loan.

In a business context, it is rarer to see unsecured debt (particularly in a tight credit environment that we have been experiencing) and where there is an unsecured loan, there will typically be tighter restrictions and oversight.

Some of these restrictions may come in the form of cash flow obligations or certain financial ratios that the business must maintain in order to be considered “solvent” or “not in default” in accordance with the loan documents.

To best handle your debts, you will need an experienced and practiced attorney who can help you make the best decisions for you and your family. As a former trustee for the U.S. Bankruptcy Court, with over thirty-five years experience, Martin Long is an expert in the industry with decades of experience in Bankruptcy Law in Colorado. We also serve Aurora, Centennial, Highlands Ranch, Denver, Littleton, Castle Rock and the Denver metro area with three convenient locations. For help with your financial matter, call the Law Office of Long & Long for a free initial consultation at 303-832-2655 or go to www.denverbankruptcylawyer.net and make a consultation request.