Unsecured debt: definition & examples

The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

Unsecured debts are loans or credit lines without collateral. This includes credit card debt, medical bills, personal loans and student loans. Failure to pay unsecured debt can result in collection efforts and damage to credit.

Are you overwhelmed by all the different loan options? Are you searching for a sustainable debt solution? Depending on your financial situation, unsecured debt may be the right option for you.

You can make informed financial judgments by understanding unsecured debt and its implications. This article will delve into the world of unsecured debt, explain its definition and give examples, explore the differences between secured and unsecured debt, shed light on the impact of bankruptcy and more.

Let’s explore unsecured debt and how it can impact your finances.

Key takeaways:

  • Unsecured debt refers to loans or credit lines without collateral.
  • Credit card debt, medical bills and personal and student loans are common examples of unsecured debt.
  • Failing to pay unsecured debts can lead to collection efforts and hurt your credit.
  • Prioritizing debt repayment is crucial, and understanding the differences between secured and unsecured debts can help you make strategic decisions.

What is an unsecured debt?

Unsecured debt is a financial obligation that does not require collateral. Unlike secured debt, backed by specific assets, unsecured debt relies solely on the borrower’s creditworthiness and promise to repay. Examples of unsecured debt include credit card debt, medical bills, personal loans and student loans.

  • Credit card debt: When you make purchases using a credit card, you accumulate unsecured credit card debt. The credit card company extends you a line of credit without requiring collateral.
  • Medical bills: Unforeseen medical expenses can result in significant unsecured debt. These bills typically arise from medical procedures, treatments or hospital stays.
  • Personal loans: You can obtain these from banks, credit unions or online lenders. They have various purposes, such as debt consolidation, home improvements and unexpected expenses.
  • Student loans: Student loans are used to finance education expenses. The government or private lenders offer them, and they can have long repayment terms.

What happens if you don’t pay an unsecured debt?

If you fail to pay your unsecured debt, there may be significant consequences. While specific actions may vary depending on the creditor, here are some potential outcomes to beware of:

  • Collection efforts: Creditors may employ collection agencies or pursue legal action to recover the debt. These efforts can involve phone calls, letters or even lawsuits.
  • Negative impact on credit: Unpaid unsecured debt can harm your credit. Late payments, defaults and charge-offs can contribute to a lower credit score, making obtaining future credit or loans more challenging.
  • Legal proceedings: In extreme cases, creditors can file lawsuits to obtain a judgment against you. This can result in wage garnishment or liens on your property.

Secured debt vs. unsecured debt

Understanding the differences between secured and unsecured debt is crucial for effective financial management. Simply put, secured debt is backed by specific collateral, such as a car or house, while unsecured debt lacks collateral. In the event of default, secured creditors can seize the specified assets, while unsecured creditors do not have this option.

Additionally, secured debtors usually need fewer eligibility requirements, their interest rates may be lower and they can qualify for higher loan limits since there is less risk from the lender’s point of view. But there can be a few disadvantages, like dealing with foreclosure, repossession or losing assets if the borrower cannot pay.

For unsecured debtors, the loan limit is usually lower, and interest rates tend to be higher. Still, there are a few advantages of unsecured loans, like there is no risk of losing assets, your credit can improve over time and you can set up the loan to require smaller payments for a more extended period.

What happens to secured and unsecured debts during bankruptcy?

Bankruptcy affects secured and unsecured debts differently. According to Chapter 7 of the United States Bankruptcy Code, unsecured debts are typically discharged, meaning you no longer have to repay them. However, secured debts may require surrendering the collateral or restructuring the debt through a reaffirmation agreement.

In Chapter 13 bankruptcy, often called “reorganization bankruptcy,” you create a repayment plan to gradually pay off your debts over a specific period, usually three to five years. Both secured and unsecured debts are included in this plan, with priority given to secured debts.

Remember that bankruptcy laws and procedures can vary by country, and the chapter designations mentioned above specifically apply to bankruptcy filings in the United States. It’s always advisable to consult with a legal professional or consultant knowledgeable about the bankruptcy laws in your specific jurisdiction.

Is secured or unsecured debt better?

Whether secured or unsecured debt is better for you depends on different factors, including your financial situation and credit, what you can or cannot risk and your goals. It is generally advisable to prioritize secured debts due to the potential collateral loss. Falling behind on mortgage or car loan payments can lead to foreclosure or repossession. However, neglecting unsecured debts can still have significant consequences, including damage to credit scores and collection efforts.

It is also important to see it from the lender’s perspective—secured debt tends to be better for them since it is less risky. Lenders can always claim the collateral so they can regain the lost funds. This makes secured debt riskier for borrowers since they can lose their assets if payments are impossible.

Unsecured debt FAQ

As you continue to explore the world of unsecured debt, we want to address some frequently asked questions.

What is an example of unsecured debt?

An example of an unsecured debt is credit card debt. When you make purchases using a credit card, you incur an unsecured debt with the card issuer without requiring collateral.

What are two types of unsecured debt?

Two other types of unsecured debt are personal loans and medical bills. Personal loans are funds you borrow from a lender without collateral, while medical bills accumulate when you receive healthcare services and don’t require collateral.

What is an unsecured debt called?

Unsecured debt is commonly referred to as personal debt. It is a financial obligation that is not tied to specific assets.

What happens if an unsecured debt is not paid?

If you don’t pay an unsecured debt, the creditor may employ collection efforts or pursue legal action to recover the debt, and your credit will likely take a hit.

Can unsecured debts harm your credit?

Defaults, collection actions and late or unpaid payments can harm unsecured debtors’ credit scores. Prioritizing timely debt repayment is crucial to maintaining healthy credit. On the other hand, your credit rating can improve if you pay on time regularly since that shows your commitment.

In conclusion, understanding unsecured debt is essential for making informed financial decisions. By grasping the concept, differentiating it from secured debt and recognizing its implications, you can strategize debt repayment and protect your credit.

Unsecured debts and credit repair

If you’re concerned about your credit, see if the team at Lexington Law Firm can help. Empower yourself with the knowledge to make informed decisions and work on your credit with our services. Reach out to Lexington Law today to get a free credit assessment and learn more about how we could help.

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.

Reviewed By

Vince R. Mayr

Supervising Attorney of Bankruptcies

Vince has considerable expertise in the field of bankruptcy law. He has represented clients in more than 3,000 bankruptcy matters under chapters 7, 11, 12, and 13 of the U.S. Bankruptcy Code. Vince earned his Bachelor of Science Degree in Government from the University of Maryland. His Masters of Public Administration degree was earned from Golden Gate University School of Public Administration. His Juris Doctor was earned at Golden Gate University School of Law, San Francisco, California. Vince is licensed to practice law in Arizona, Nevada, and Colorado. He is located in the Phoenix office.