What Is an Unsecured Debt?

If you have an unsecured debt, such as credit card debt or medical bills, you haven't pledge property to guarantee payment.

A debt is unsecured if you borrowed money without pledging any property to ensure loan repayment. You must pay the obligation, but if you don’t, the creditor could sue you for a money judgment. Without a money judgment, the creditor cannot take your property, sell it, and use the proceeds to pay down the debt. By contrast, if you agree to give the lender collateral, you have a secured debt.

Unsecured Debt Types

Most people are familiar with secured debts, such as a mortgage or a car loan. In each case, the lender can take the purchased property—the car or the home—if the borrower fails to pay.

If you have unsecured debt, however, the lender doesn’t have that right. Here are some common examples of unsecured debt:

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

In each case, the lender can’t take the property you bought on credit, or any other property, without doing more. Learn more about priority, secured, and unsecured debts.

If You Don’t Pay Unsecured Debt

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

  • ask you to pay using phone calls and letters
  • hire a collection agency to try to collect the debt, and
  • report your failure to pay (or late payments) to a credit reporting agency.

Turing an Unsecured Debt Into a Secured Debt

If these measures don’t work and the creditor would like to force you to pay, the creditor must file a lawsuit. With a money judgment from the court, other collection avenues become available, such as wage garnishments and bank account levies.

In that case, you might be able to protect some of your property by using exemption laws to keep it out of the hands of creditors. State exemption laws allow you to keep property away from creditors, both in collection actions and if you file for bankruptcy (the exemptions you can use will be the same in most, but not all, states).

Learn about your options for dealing with credit card debt.

Unsecured Debt Contracts

You create debt 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. Unless you entered into a verbal agreement, you'd find the loan terms in the contract. The contract conditions bind both you and the lender. If you’re unsure whether the lender is abiding by the agreed terms, it’s prudent to contact a local attorney.

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