Filing Bankruptcy Can Discharge Secured and Unsecured Loans
Before a lender makes the decision to loan money to an individual, they must evaluate a consumer’s credit history. Once the preliminary screening has been done, the lender has a choice to lend to consumers under two main categories: secured and unsecured debt. It is important to understand the differences between secured and unsecured debt if you are planning on applying for a loan, or filing for bankruptcy, so you can understand what financial options are available to you.
Secured Debt:
Secured debt is easier to attain than an unsecured debt. Secured debts are given to individuals who give up an interest in some asset to the borrower as insurance so they do indeed repay the debt related to the loan. There is less risk for the lenders when they hold an asset as collateral. Because of the reduced risk, interest rates tend to be lower for this type of loan. Typically secured debts are tied to some type of property the borrower owns. This property serves as the collateral for the loan. Common assets used to retain a secured loan are:
- Auto Loans
- Mortgages
- Home Equity Loans
- Personal Loans from various financiers
- Business lines of credit
For example, in regards to a home loan, if the borrower defaults the bank can seize the property and sell it to recover the funds owed. It is common for lenders to require the asset used as collateral be insured under certain specifications to maintain its value.
Unsecured Debt:
While secured debt requires an asset as collateral, unsecured debt requires no security for the loan. That means no collateral is needed to receive the funds. A lender can decide to offer an unsecured loan if the borrower has strong credit history and little history of problems repaying loans in the past. When dealing with unsecured debt, the lender must sue the borrower to collect any funds owed if the borrower defaults on their loan payments. There is considerably more risk when offering an unsecured loan, so banks typically charge higher interest rates than they do for secured loans. Receiving an unsecured loan usually means you are in excellent financial standing and you have been deemed credible by the lenders. Some common examples of unsecured debts are:
- Rent and utility payments
- Credit cards
- Student loans.
Always read the terms and conditions carefully when you sign up for a new credit card, or when you agree to any loan.
Having many secured and/or unsecured debts can lead to an inability to remain solvent. If you have any secured or unsecured loans that you think you might not be able to pay, then filing bankruptcy could be a viable solution for you. Taking a simple 5-minute bankruptcy evaluation, is the easiest way to find out if filing bankruptcy is right for you.