A. Secured Debt: If the creditor has a legal right to take an asset, such as a house or car, if you fail to pay the loan, the debt is secured. A creditor whose debt is secured by collateral has the right to use the collateral to satisfy the secured debt if the debtor defaults on his or her obligations. Most secured debts are created voluntarily when a debtor willingly pledges property to secure a debt. For example, most homes are burdened by a mortgage, which is a form of secured debt. If the debtor defaults on a mortgage, the secured creditor has the right to begin foreclosure proceedings against the real property that secures the underlying loan. Also, many people who buy cars pledge the vehicle to secure the loan, giving the lender a “security interest” in the car. Outside of bankruptcy, this form of secured debt may give the lender the right to “self-help repossession,” allowing the creditor to take the collateral without first seeking permission from a Court. Secured debts can also be created without the debtor’s permission in certain circumstances such as a statutory lien (i.e., a mechanics lien or a judicial lien). If the creditor has no right to take property but only can sue you for payment, the debt is unsecured.
B. Unsecured Debt: An unsecured debt generally consists of only one transaction — the debtor borrows money and makes a binding promise to repay the loan. An unsecured debt is not supported by a pledge of collateral, and the lender has no right to use the debtor’s property to satisfy the debt. An unsecured debt may become a secured debt if the lender obtains a judgment against the debtor and uses this judgment to create a judicial lien.
C. Priority Debt: Priority debts are special types of unsecured debt that are entitled to be paid before other unsecured debts are paid in a bankruptcy case. Section 507(a) of the Bankruptcy Code lists types of unsecured debt that are given priority treatment under the Code. These include certain taxes, certain wage claims of employees, debts related to goods and services provided to a debtor’s estate during the pendency of a bankruptcy case, and domestic obligations. If you have questions when deciding which of your debts are entitled to priority status, you should consult an attorney.