What Is an Unsecured Debt?

If you have an unsecured debt (such as credit card debt, student loans, and medical bills), it means you haven't pledge property to guarantee payment.

A debt is money that you owe. If the debt is unsecured, it means that you borrowed money without pledging any property to insure repayment of the loan. You are obligated to repay the loan but, if you don’t, the creditor or person you owe the money to, must first sue you and get a judgment before they can try to collect from property that you own. (If you do pledge property to guarantee payment of the debt, then the debt is secured.)

How Unsecured Debt Is Created

Debt is generally created when someone lends you money, provides you with credit that you use to buy items or services, or provides you with services that you agree to pay for later. If the creditor does not require you to pledge collateral to insure repayment, the debt is unsecured.

Some examples of ways you create unsecured debt include:

Promissory notes. Often a creditor who is lending you money will require you to sign a promissory note that identifies the amount owed, the interest rate it will charge you, and the payments you must make.

Purchases or services provided on an account. Creditors send account statements to identify the services provided or identify the purchases you made and the amount of unsecured debt that is owed. And example of debt created this way is a credit card account.

Verbal agreements. You can create a debt without signing anything. These types of agreements are usually between friends and family.

Common Examples of Unsecured Debt

Some common examples of unsecured debt include:

  • credit card debt
  • medical bills
  • utility bills (with no deposit)
  • personal loans
  • tuition, and
  • student loans.

Your Obligation to Pay Unsecured Debt

Just because a debt is unsecured doesn’t mean you don’t have repay it. If you don’t repay unsecured debt as originally agreed, the person you owe money to can:

  • file a lawsuit to collect the debt
  • hire a collection agency to try to collect the debt from you, and
  • report your failure to pay (or late payments) to a credit reporting agency.

How a Judgment Can Turn an Unsecured Debt into Secured Debt

If a creditor sues you for unpaid unsecured debt and gets a judgment against you, it can use the judgment to:

You may be able to protect some of you property by using exemption laws to keep it out of the hands of creditors, but if you can’t, the creditor can ultimately collect unsecured debt from property you own.

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