Whether a debt is secured or unsecured makes a big difference in how that debt is treated. Therefore it’s important to understand what a secured/unsecured debt is.
Secured debts are loans secured by collateral. For example, car loans are secured debts, because if the payments are not made then the creditor can repossess the car to recover the debt owed. An unsecured debt on the other hand, is when there is no security or collateral held by the person or company that provides the money to buy goods or services. Unsecured debts include credit cards, rent, power accounts, overdrafts or unpaid taxes.
Secured debts can be voluntary or involuntary. Home mortgages and car loans are examples of secured debts that are incurred voluntarily whereas real property tax es come under involuntarydebts. A lien is the interest that a creditor or other entity has in specific property, where ownership of the property is evidenced by a legal title document. A secured debt in Chapter 7 bankruptcy has two legal components: personal liability for the amount borrowed and the security interest or lien, the lender takes. Even though, Chapter 7 eliminates the legal liability for the debt, it still allows the secured creditor to take the property and sell it. However, the creditor will have to accept whatever he can get for the property.
One of the steps that a secured creditor must take to protect its position is to perfect its lien. Perfection refers to the action required to give other creditors and interested parties notice of a lien or security interest. In bankruptcy proceedings, the court can set aside a lien that is not properly perfected. A lien that is set aside is treated as if it never existed in the first place.
One of the important differences between an unsecured debt and a secured debt is how the creditor can enforce rights in case of failure by the debtor to make payments. An unsecured creditor must first sue the debtor in court before they can take any of the property, whereas a secured creditor can repossess or foreclose the property. The secured creditor also has the additional option of filing a court action.