What Is Unsecured Debt?


Some loans require collateral to back them. Property or assets used as collateral can be seized by a lender if you default on payments. Unsecured debt is unique in that there is no collateral backing it, meaning property can’t be seized if you default on paying the loan or balance. The lender therefore has no way of recouping its losses.


How Do I know My Debt Is Unsecured?

What is unsecured debt from your personal perspective? You are probably using unsecured debt and may not even realize it. There are many types of debt that is not secured by collateral, including:

  • Credit card balances
  • Student loans
  • Medical loans
  • Utility bills
  • Lawyer’s fees
  • Taxes


Consequences of Not Paying Unsecured Debt

Failing to pay a credit card bill or other unsecured financial obligation won’t result in having any property seized. However, neglecting to pay or having excessively high amounts of debt can affect your credit score. You may be charged late fees for not paying. After a certain amount of time, your debt may be sent to a collection agency, and it will become harder to obtain new credit cards or a loan. A lawsuit, property lien, or wage garnishment may result as well. In extreme cases, a court judgement can require you to use personal assets to repay an unsecured loan.


How Unsecured Debt Works

For lenders, unsecured debt is riskier than secured debt. Interest rates are higher as the lender has little protection should the borrower default, including when they intentionally do so through bankruptcy. That’s why, if you’ve filed for bankruptcy in the past, it’s often more difficult to secure a new loan.

As you use unsecured debt, such as charging to and paying a credit card, lenders report your activity to the credit bureaus. Being responsible can raise your credit score, while late payments and defaulting on a loan lowers it and can appear as negative information on your credit report. Your credit history, therefore, has a big impact on whether you qualify for unsecured loans and credit cards.


How to Pay Off Unsecured Debt

Excessive amounts of debt and high interest rates can make it hard to pay off unsecured debt. But it is possible by trimming your monthly expenses, reallocating money saved, and prioritizing debts with higher interest rates. In some cases, you can refinance unsecured debt, which can result in a lower interest rate and lower monthly payments to your lenders.

There are many options to stay on track and avoid a court judgement. But the more unsecured debt you have, the more difficult it can be to pay off, while missing payments adds even more hardship.


What If I’m Drowning in Unsecured Debt?

If the strategies mentioned above don’t help your situation, OakTree Law offers alternatives. We are highly experienced Los Angeles bankruptcy lawyers and can determine whether Chapter 7, Chapter 13, or Chapter 11 bankruptcy may be best for you. Most, if not all your debts may be dischargeable, and if you’re facing harassment by creditors, calls from collection agencies, or wage garnishments, we can stop them. Your focus may go from “What is unsecured debt?” and how do I pay it to “How do I build my credit after bankruptcy?”

To request your free evaluation with OakTree Law, contact us online or call 888-348-2609 today.