When taking out a substantial loan, it’s common to agree to put up property (collateral) to ensure that you’ll repay the lender. The collateral not only gives the lender a sense of security but actual ownership rights in the property in the form of a lien. The lien remains on the property until you pay off the loan or obligation. This type of loan is known as a “secured debt.”
By contrast, you don’t agree to let a credit card or personal loan lender take property if you breach the contract terms. This type of debt is an “unsecured debt.” Learn more about priority, unsecured, and secured debt in bankruptcy.
In most cases, the property pledged as security will remain with the borrower. You’ll retain ownership as long as you follow the contract agreements made when taking out the loan. Staying current on the monthly payment is the most common, but you might have to maintain insurance or abide by some other condition.
If you don’t make the payments you agreed to make when you took out the secured loan, the creditor can take back the property. The most common are through repossession and foreclosure.
For instance, when taking out a car loan, most borrowers agree to give the lender a lien on the car. If the borrower fails to pay, the lender can repossess the vehicle, sell it at auction, and use the proceeds to pay down the loan. But, the borrower will keep the car as long as the car loan payments remain current.
A home purchase is another typically secured debt. The borrower agrees to collateralize the loan with the house. The lien interest allows the lender to foreclose on the home in the event of a contract breach.
Here are more examples of typical secured debt types:
Find out about releasing liens in bankruptcy.