Unsecured debt is debt that is not linked to any specific piece of property of the debtor. Credit card debt, for instance, is the most common unsecured debt. Unsecured debt is obtained by the debtor in exchange for a promise (a contract) that he/she shall repay that debt. In case of nonpayment, the lender of an unsecured debt can institute a breach of contract court action against the debtor. If that action results in a judgment in favor of the lender and against the debtor, the lender can attach (go after) the debtor’s property to secure payment of that judgment.

Secured debt, on the other hand, is debt that one takes on in exchange for placing his/her property (known as the “collateral”) on the line. In other words, the debtor of secured debt promises the lender payment of the debt and, in case the debtor fails to repay, the lender has the right to take possession of the property that the debtor used as collateral to obtain the secured debt.

Mortgage loans and auto loans are the most common examples of secured debts. If the debtor fails to pay his mortgage loan, the lender has the right to foreclose on the property and take possession of said property.   Similarly, if the debtor of an auto loan fails to repay, the lender has the right to take possession of the vehicle.

Related entries