Simply put, debt is owing money to someone else. However, there are many types of debt—each with its own legal and financial obligations. Understanding the various categories and types of loans available will strengthen your ability to better manage your own personal debt.
SECURED DEBT
All debts are either secured or unsecured. When an interest in property is given to your lender to make the loan safe, you have a secured debt. Examples of secured debt are your home mortgage and your car loan. The lender puts everyone on notice about its interest in your property by filing a mortgage on your real estate or a security interest in your personal property in the appropriate county or state records. The lender will secure its interest in a car or mobile home by placing its lien directly on the title.
Where the lender has taken the proper steps to record its interest, you cannot sell the property without either paying off the lender or having the buyer take the property subject to the lender’s interest. The property given as security is also referred to as collateral.
The lender may also take an interest in personal property by taking possession of it.
Unsecured Debt becoming Secured Debt
An unsecured debt may become a secured debt if a judgment becomes a lien (or claim) on your property. Even without judgments, some states allow liens to be filed. In Florida, for example, condominium associations generally have the right, without first getting a judgment, to place a lien on your property if you do not pay your condominium association assessments. Likewise, people that you employ to work on your property or provide material may be able to file a lien before getting a judgment if you do not pay them. A judgment may also become a lien on your property. Ultimately, the lienholder
may take the property and foreclose its lien, just like a creditor to whom you actually gave a security interest in your property.
Lender Selling the Collateral
After the lender sells the collateral, depending upon your loan agreement, he or she will then apply the money from the sale, less expenses, to your loan. This does not necessarily mean that you are no longer liable to your lender. The loan document you signed may also give the lender the right to get a deficiency judgment against you if the amount realized from the sale is not enough to pay the balance due on the loan. (Deficiency judgments are discussed in other chapters in this book.)
Right of Set-Off
If you have several accounts at one bank as well as a loan, and you fail to make your payments on the loan, the lender may have the right to take the money from your deposit accounts and apply it to your debt. This is called the bank’s right of set-off.
However, the bank may do this only if this was disclosed to you in the loan documents. The bank cannot use your other accounts as collateral without meeting the disclosure requirement. Otherwise, you can sue the bank for damages, including any cost to you for overdrawn checks.
UNSECURED DEBT
An unsecured loan is one for which the lender has taken no collateral. Most credit cards and any loan given to you requiring only your signature are unsecured loans. (The signature of someone guaranteeing payment, or a co-signer, is given as security for the debt.) Unsecured debt also includes any amount you owe for services, such as doctor’s bills. The service provider (i.e. hospital, doctor, dentist, accountant) and the creditor of an unsecured debt will often first try to contact you personally in an attempt to work out payment of the outstanding bill.
