What Is Secured Debt?

Secured debt is money owed to a creditor who is “secured” by a specific piece of real property (like a house or land) or personal property (like a car). If the creditor doesn’t receive monthly payments under the terms of the secured loan, they can take the property instead. 

Secured Debt and Real Property

A mortgage loan is secured by real property (your house). When you buy the house, you borrow money from the bank in the form of a home mortgage. In addition to your promise to repay the mortgage loan, you agree that the bank can foreclose if you fall behind on payments. 

Secured Debt and Personal Property

Car loans are secured debts. Just like with the mortgage, when you purchased your car you granted the bank that loaned you the money for it a “security interest” in the vehicle. Because of this security interest, the bank can repossess the car if payments aren’t made. Unlike unsecured creditors, a secured creditor doesn’t have to get a court order first. That’s because you agreed to a repossession as part of the loan agreement. 

Speaking of unsecured debts, they’re the opposite of secured debts. They’re not connected to any specific piece of property. No matter what you purchase with your Visa card, Visa can’t come and take that stuff from you. 

Common Examples of Secured Debt

• Home mortgages

• Home equity lines of credit 

• Auto loans

• Secured credit cards

Secured credit cards are a bit of a mix between the two types of debt. They operate like a credit card because you can use them anywhere credit cards are accepted. Plus, if you end up defaulting on your monthly payments the bank can’t take the stuff you purchased with the credit card.  Instead, they can take the security deposit you paid when you opened the account. Secured credit cards are a popular way to establish or rebuild credit because your credit rating is less important to the bank. They’re going to get paid no matter what. 

What Are Some Examples of Unsecured Debt? 

• credit cards

• personal loans

• medical bills

• lines of credit

• student loans

Are There Benefits To Getting a Secured Loan? 

So far, all you’ve read is about what happens if a borrower defaults. That, by itself, makes secured debt sound like a bad deal. After all, the bank or credit union can take your property back without first getting a court order. That’s only one end of the spectrum, though. The benefits of secured debt are most noticeable when the secured loan is taken out. 

You Can Get a Lower Interest Rate

Since this interest in property (called collateral) gives the bank a level of security that the typical credit card company doesn’t get, secured loans are often offered at lower interest rates than unsecured loans. Now, the bank or credit union will still want to see your credit report, but your credit history and credit score are less important than if you’re applying for an unsecured loan or credit card. 

Your Credit Rating Is Less Important

Similarly, it’s typically easier to get a secured loan than an unsecured loan if your credit history is a bit spotty. So, while a bad credit score may result in a higher interest rate than someone with a spotless credit history, just getting a secured loan is typically easier.

Getting a Secured Loan for Debt Consolidation

Home equity lines of credit — loans secured by real estate — can be a great way to consolidate high interest credit card debt. As long as there’s equity - meaning the home is worth more than what you owe on the mortgage - and the proposed monthly payment works for your budget, this is a great way to pay off your debt “cheaper” and a common type of debt management for homeowners. 

In a debt consolidation, you take the funds from the line of credit and use it to pay off the high interest credit card debt. Then you pay off the home equity line of credit - usually at a much lower interest rate. If your income is sufficient to make that monthly payment, then the only real risk with the consolidation loan is that it’ll be tempting to use your credit cards again. Since running up new debt can make paying for a home equity loan difficult (if not impossible), try to avoid that if possible. Otherwise, there’s a risk that you’ll default on your monthly loan payments. 

What Happens to Secured Debt in a Chapter 7 Bankruptcy?

The Chapter 7 discharge eliminates your obligation to pay back the secured loan. But, if you want to keep the property that the bank has a security interest in, you’ll need to plan to stay current with your monthly payments. The article titled Can I Keep My Car If I File Chapter 7 Bankruptcy? in our Learning Center explains exactly how that works for personal property (i.e. a car). If you have secured debt in the form of a mortgage, then - to keep the house even after filing Chapter 7 bankruptcy - you’ll want to make sure you’re current on your mortgage payments and stay current. As though the bankruptcy never even happened. 

If you’re ready to walk away from the property and get out of the secured debt for good, you also have the option of surrendering the collateral to the bank. They get to sell it at auction to the highest bidder and you get to discharge your obligation to pay the debt, no matter how much is left owing. You’ll tell the court and the secured creditor what option you want to choose the Statement of Intentions, one of the bankruptcy forms filed in a Chapter 7 bankruptcy case. It’s a little more complicated in a Chapter 13 bankruptcy. If you’re interested in learning more about your debt relief options under Chapter 13 of the Bankruptcy Code, check out the article titled What is a Chapter 13 Bankruptcy? in our Learning Center. 

Let’s Summarize…

Secured debt is connected to a piece of property that the bank can repossess (or foreclose, in the case or real property) if there is a payment default. As long as you are current with your monthly payments and continue to make timely payments, you can keep the property securing the debt even after filing Chapter 7 bankruptcy. 

Upsolve Co-Founder Jonathan Petts explains the basics in the video below ⬇️

Thinking about Chapter 7 bankruptcy? 

If you’re thinking about filing Chapter 7 bankruptcy but are worried because you can’t afford to hire a bankruptcy lawyer, see if you’re eligible to use Upsolve’s free web tool to help you prepare your bankruptcy forms.