What is the difference between secured and unsecured debt?

Secured debt is debt that is backed by property. It is debt that you pledge your personal property (such as a vehicle) or real property (such as a house) as collateral for the debt. If you weren’t able to complete the payments, the creditor would be able to take the property that is backing the debt. The two most common examples of secured debt would be your car and your home. So if you buy a house, and don’t make the payments, the creditor would be able to take that property.

Unsecured debt is simply based on your promise that you will pay the money back by a certain time. This is the way credit cards and some personal bank loans work. There is no pledged property to “secure” the debt. Secured debt and unsecured debt are treated very differently in bankruptcy. In general you will be able to discharge or eliminate all of your unsecured debt. Regarding your secured debt, you will have three options. You will delineate your choice under a form called the Statement of Intention. Your Statement of Intention will be filed as part of your petition or within 30 days after the petition is filed. Your stated intention must be carried out within 45 days after the trustee meeting. The first option is to surrender the property. For example if you are behind on a car that is truly just a lemon and you owe way more than the old car is worth, you may simply want to surrender the vehicle with the understanding that you will not be responsible for any deficiency or difference between what the bank can recover from selling the vehicle at auction and what is owed on the loan. The second option is to redeem the property. To redeem the property means to pay the present value of the property in one lump payment instead of paying the full amount owed under the loan. This is typically not an option for people as they do not have the money available right away to put a lump sum. The third option is to reaffirm the property. Understand that by filing bankruptcy, you shield yourself from any personal liability separate from the collateral itself. In other words, after you file for bankruptcy, the creditor’s only recourse against secured debt is to take back the collateral however creditors lose the privilege of suing you personally for the loan. By reaffirming the secured debt you are reaffirming your personal liability. If you change your mind and want to rescind the reaffirmation agreement, this must be done within 60 days after the agreement is filed with the court or before your case is closed, whichever comes first. Note that there are legal intricacies regarding your options and recommended treatment of secured debts.

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