What is the difference between secured and unsecured debt?

Secured debt is debt that a debtor has backed up with collateral. In other words, the borrower pledges property (such as a house or a car) to the lender in order to ensure the borrower will repay the loan. If the borrower defaults on the loan, the lender can seize title to the property. A home mortgage is a secured debt.

Unsecured debt is not secured with property. Instead, unsecured creditors often use higher interest rates. Credit cards and student loans are examples of unsecured debt. 
Priority of creditors in bankruptcy

The U.S. Bankruptcy Code determines which creditors have preference over others in collecting on their debts during bankruptcy.

Secured creditors have protections above those of unsecured creditors. For example, in a Chapter 7 bankruptcy case, most unsecured debts can be discharged without consequence. Secured debts can also be discharged, but secured creditors have a right to take the property that was used as collateral on the loan.

A debtor may choose to pay off debt and make payments on secured claims during bankruptcy. Otherwise, he or she must surrender the property, agree to pay back the loan through a reaffirmation agreement or redeem the property (pay the lender the full value of the property as of the date you filed for bankruptcy).

Some unsecured debt does take priority under the Bankruptcy Code. These debts include (in order of priority):

  1. Domestic support obligations (child support, alimony, etc.)
  2. Administrative expenses related to the bankruptcy case
  3. Debts incurred between the filing of an involuntary petition and declaration of bankruptcy
  4. Employee wages, salaries or commissions
  5. Unpaid contributions to an employee benefit plan
  6. Claims for product against grain producers and fishermen
  7. Consumer layaway deposits
  8. Certain tax debts
  9. Claims involving commitments to Federal depository institutions regulatory agencies
  10. Personal injury claims involving fatal DWI/DUI accidents

Source: U.S. Bankruptcy Code, 11 USC Section 507, “Priorities.”


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