Different types of debt carry different consequences while they are active and in the event of a default. Whether people are struggling to make payments or have a surplus of cash they'd like to use to pay off their debts faster, it's important that they know how their debt can affect them. The best place to start is by understanding the two major forms of debt: secured debt and unsecured debt. This white paper will explain what each form of debt is, the consequences of defaulting, how each type of debt can affect your credit score, which to prioritize and under what circumstances, and finally tips to reduce and eliminate debt. If you have more questions about the different types of debt and how to handle them, contact a representative at Advantage CCS. (Source: http://www.advantageccs.org/secured-debt-and-unsecured-debt.html)

2. July 2013 2
What You Need To Know about Secured
Debt & Unsecured Debt
There are two major types of debt:
secured debt and unsecured debt. Each
type is incurred in different ways and
bears different consequences should you
default. Understanding the characteristics
of each can help you prioritize your debt
so you can better calculate how to pay
down your bills smarter.
Secured Debt: Voluntary, Involuntary &
Defaulting
Simply put, secured debt (or lien) is money
you owe backed by collateral that the
lending institution or creditor can collect
on if you default. Home mortgages are an
example of secured debt because if the
borrower defaults on payments, the bank
has the right to seize the home. The bank
would then sell the property to recover
the remaining amount of debt. A home
mortgage is also an example of voluntary
secured debt. Individuals can voluntarily
take out loans against other types of
property as well, such as:
• Vehicles
• Furniture
• Equipment
• Inventory
• Investments (e.g., shares of stock)
Secured debt is involuntary when you are
required by law to make payments against
your property. Payments may be imposed
by federal law, state law, or even court
order. These include:
• Real property taxes
• Income taxes (after delinquency)
• Court judgments
(if wage garnishment or repossession is
granted)
If a borrower defaults, or fails to pay back
secured debt, the creditor must “perfect
the interest” by filing a legal claim on the
property in question with the appropriate
agency. This is also called placing a lien
on the property. A lien can prevent you
from selling the property or transferring
the title to another person. It also notifies
other creditors that the filing creditor has
the rights to the property. This is especially
important for creditors in cases where
multiple lines of credit are taken out
against the same property (think home
mortgages and equity lines of credit) or
when filing for Chapter 7 or Chapter 13
bankruptcy.
However, creditors can collect on secured
debt usually without going to court if
you default on your loans and haven’t
filed for bankruptcy. Direct repossession
(especially of cars parked on the street)
and foreclosure are both possible without
a court order in many states as long
as creditors do not trespass on private
property or disturb the peace. Court
action is also an option for creditors to
recover the full obligation.
Unsecured Debt: Types of Debt &
Defaulting
The opposite of secured debt, unsecured
debt is an obligation not backed by
collateral. This is regarded as a much
more risky venture for creditors, so they
expect more of a return. This usually
results in higher interest rates. Most debt
is unsecured debt, including:
• Credit card debt
• Utilities bills
• Medical bills
• Student and personal loans
• Income taxes (before delinquency)
• Court judgments (if wage garnishment
or repossession is not ordered)

3. July 20133
If an individual fails to make a payment or
defaults on unsecured debt, creditors can
contact you to ask you for the payment,
report the event to credit bureaus, and
file a lawsuit against you. However,
nongovernmental unsecured creditors
are not allowed to seize any of your assets
without a court order.
After obtaining a court order, creditors
may be able to investigate your income,
other debts, and assets; garnish your
wages and savings; and seize and sell
real and/or personal property. The
percentage of your wages creditors are
allowed to garnish varies from state to
state, and certain laws also protect some
of your personal assets from seizure
(e.g., primary residence, pension plan, and
home furniture).
How Secured & Unsecured Debt Affect
Credit Score
For both secured and unsecured debt, late
payments are reported to credit bureaus
and will have a penalty (a loss of 60-110
points for a single 30-day late payment).
Defaulting on either form of debt is
also reported to the credit bureaus.
For unsecured debt, if payments are
delinquent for over 150 days, the account
will be marked “charged off” on your
credit report and remain there for 7 years.
This means the lender could not recover
the debt and wrote the amount off as a
loss. However, the debt is still active, and
creditors can still collect on it through
court action for 3-10 years depending on
the state you live in.
For secured debt, property seizures
are also reported to credit bureaus.
Homes will appear on a credit report as
foreclosures and other items, including
cars, will appear as repossessions. Charge-
offs, foreclosures, and repossessions can
all seriously impact your credit score. Your
credit score may drop 80-160 points for
each offense depending on other factors
of your credit score, and the defaulted
status will remain on your credit report for
7 years from the date of the first missed
payment.
creditors can collect on secured debt usually
without going to court if you default on your
loans & haven’t filed for bankruptcy.

4. July 2013 4
Which Debt to Pay off First?
If you find yourself in a position where you are choosing which payments to make,
secured debts are generally the better choice. These payments are usually harder to
catch up on, and you stand to lose a real asset (e.g., shelter, personal transportation,
etc.). This hard loss also hits your credit score exceptionally hard.
On the other hand, if you are making extra payments to get out of debt faster, unsecured
debts are usually the way to go. They often carry higher interest rates than secured
debts, so the faster you pay them down, the more money you ultimately save in the
process. However, it’s important to remember that even when you are focusing on one
debt to pay off first, you still need to pay at least the minimum amount on all your loans
and lines of credit.
Tips to Reduce Unsecured Debt
The best way to approach unsecured debt is to live within your means and spend less
than you earn. However, if you are already in a situation where you are struggling to
meet your monthly obligations, there are still a few options for you.
AssessmentandBudgeting.Firstit’simportanttounderstandwhatyourfinancialposition
is. Take an inventory of all the income you have and what you spend every month. Write
down rent/mortgage payments, utilities bills, food, student loan payments, credit card
bills, medical or insurance bills, savings, other commitments, and how you spend the
remainder of your money (clothes, cosmetics, coffee, etc.). If you are spending more
than you’re taking in, you’ll have to make cuts somewhere, and this list will help you see
where you can scale back. Debt counselors can also work with you to find more tailored
ways of curbing your spending to get out of debt faster.
Debt Consolidation. If high interest rates on unsecured debt are creating problems,
debt consolidation may be able to help. This method combines multiple loans into a
single loan, usually lowering your interest rate in the process. Rather than lowering your
premium, debt consolidation aims to lower your monthly payments so that the debt is
more manageable.
Debt Settlement. A risky option, debt settlement firms attempt to lower the principle of
your unsecured debt by negotiating with creditors to reduce the amount. This process
requires clients to stop paying all bills from the debt in question for several months,
damaging your credit score. Clients will instead make payments into an escrow account
held by the debt settlement firm. When the account reaches a certain amount of money,
settlement negotiators will approach creditors to offer the cash available on hand in
exchange for dismissing the rest of the balance. Creditors are not obliged to consent,
and if they do, the amount dismissed will be taxed at your income tax rate.
Debt Management Plan. Those with severe debt may qualify for debt management
plans through reputable consumer credit counselors. Your credit counselor will work
with your creditors to lower interest rates and even waive late fees so that you will
have a lower monthly payment. This also allows you to pay down the principle faster.
Instead of submitting payments to your creditors, you will send a lump sum to your
credit counselor, who then arranges the payments. For those paying back multiple
creditors, this helps keep all the accounts organized. Debt Management Plans last 3-5
years, enough time for borrowers to pay off their unsecured debt.
Advantage CCS is a consumer credit counseling firm committed to offering affordable
help to those who need assistance managing their finances. For more articles on debt
management and tips on taking care of your budget, check out our blog. If you have
more questions about your finances, contact a representative at Advantage CCS today.