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Secured Debt vs. Unsecured Debt


The Bankruptcy Code defines “debt” as liability on a claim. Additionally, the Code defines the term “claim,” and it is well accepted that the two terms are used coextensively throughout the Code. However, the Bankruptcy Code does not define “secured debt,” but it does define the term “secured claim,” which the Code defines as “an allowed claim of a creditor secured by a lien on property in which the estate has an interest…is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property.” Thus, because “debt” and “claim” are used coextensively throughout the Code, “the terms ‘secured debt’ and ‘secured claim,’ therefore, are similarly related.”

Secured debt is when there is an underlying asset, or collateral, on the debt.  Assets that support a debt are called security.  If the debtor defaults on the debt, the creditor has the right to seize the security.  A secured claim is a claim where the creditor has the right to take back certain property if the debtor does not pay his or her debt.  Perhaps the clearest example of a secured debt is a home mortgage.  With a home mortgage, a bank, or other financial institution, makes a loan to the home-buyer with which the buyer buys the home.  The buyer lives in the home and pays a monthly payment to the bank.  The payment is comprised of principal, interest, insurance, and some other small expenses.  The home is the security on the mortgage.  If the buyer defaults on the mortgage payment, the bank will take the house back.  This is where bankruptcy comes in.  If the debtor files for bankruptcy, he or she may be able to keep the house and work out a way to become current on the mortgage payments.

Unsecured debt means there is no underlying asset, or collateral, on the debt.  Unsecured debt is a loan given with no collateral.  With unsecured debt, there is no tangible property attached to the debt that can be taken away if the debt is not paid.  Unsecured debt commonly consists of credit card debt or hospital bills.  With these debts, there is no piece of property that a credit card company or hospital can seize if the debtor defaults on the debt.

Secured debts carry much less risk for the loan-giver.  This is because the loan-giver can take back the property and avoid losing most or any of its money.  Therefore, a secured debt carries less risk and the secured debt will include less interest.  On the other hand, unsecured debt carries much more risk that the loan-giver might never be repaid.  Because of this risk, these debts charge higher interest on the debt.

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