Friday, September 9, 2011

FAQ #15: What is the difference between secured and unsecured debt?

Secured debts are those debts in which the borrower pledges some asset (e.g. a car or property) as collateral for the loan. In the event that the borrower defaults, the creditor takes possession of the asset used as collateral and may sell it to regain some or all of the amount originally lent to the borrower. An example of this is repossession of a car or foreclosure of a home. If the sale of the collateral does not raise enough money to pay off the debt, the creditor can often obtain a deficiency judgment against the borrower for the remaining amount.

Unsecured debt refers to any type of debt or general obligation that is not collateralized by a lien on specific assets of the borrower. In other words, in the event that the borrower fails to pay the debt, there is no collateral that the lender may recover to mitigate its financial losses resulting from the debtor’s failure to pay without suing in court.

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