Unsecured Debt

Unsecured debt is any debt that is not tied to an asset. This most commonly means credit card debt, but can also refer to items like personal loans and medical debt. Unsecured debt typically creates less stress and fewer problems than secured debt.

If you fall behind on payments for unsecured debts, your lenders have no claim on your property and cannot repossess items or foreclose on your home. That’s the big difference between unsecured and secured debt. It’s also what allows you to explore debt reduction options such as settlement to help you clear your debt faster and for less money.

Credit Card Debt

Credit card debt is the most pervasive type of unsecured debt, with Americans currently carrying $672 billion on their cards. It is a revolving line of credit, meaning you can continue to borrow each month and carry balances over. As with other loans and debts, it’s best to pay more than the minimum payment each month. However, this is an especially important principle as credit card interest rates can be very high. Paying more than the minimum will get you out of debt faster and save money in interest.

Personal Loans

Personal loans can be used for a wide variety of purposes, from funding a start-up business to paying for a vacation. A personal loan typically has a cap and is funded by a bank. Original lending terms depend on your credit history; a good credit score translates to a lower interest rate and money saved. Most personal loans will have lower interest rates than credit cards, making them a more appealing option for planned expenses.

Private Student Loans

Private student loans are another source of overwhelming debt, with Americans carrying $150 billion in this type of debt as of July 2012. These are similar to personal loans: They are funded by banks or other private lenders, and their terms depend on your credit history. However, as with federally funded ones, private student loans come with perks to allow students the time and resources they need to concentrate on their studies. In general, private student loan payments are deferred until after graduation.

Medical Debt

Medical bills are a unique form of unsecured debt. While you can choose to make purchases on a credit card, and you can choose to fund an education with student loans, no one chooses to fall ill and incur medical bills. Still, studies show that 29 percent of U.S. adults have medical debt and/or problems paying medical bills.

Apartment Leases

While rent isn’t typically thought of in terms of debt, when you fall behind on paying it, you actually become indebted to your landlord. If this happens, your landlord is likely to take action in order to evict you. However, since you are not at risk of losing any belongings, your debt is considered unsecured.

Cellphone and Utility Bills

As with unpaid rent, unpaid cellphone and utility bills are unsecured debts. If you are late paying your bills, servicing companies may disconnect your phone or utilities. However, they are not entitled to any of your assets or belongings.

Auto Repossession Overage Balances

If you miss enough payments on your auto loan, your lender will likely repossess your car. The lender then sells the car to make back the money you owed. If your car has lost value faster than you’ve repaid the loan, it’s possible the funds from the sale will not cover the entire amount you owe. The difference, called the auto repossession overage balance, is your responsibility. Since your lender has already confiscated the only asset to which it is entitled, this debt is unsecured.

Short Pay Mortgage Balances

A short payoff is one way to sell your home if you are underwater, meaning you owe more than the house is worth. Your mortgage-holder may agree to accept less than you owe. In return, you take on the balance as unsecured debt. This transaction is called a short payoff.

For example, assume your home is worth $100,000 and you owe $120,000 on it.  Your lender may be willing to settle the debt for only $110,000, but this leaves a gap of $10,000 that you owe. You will continue to make payments on this balance even after your home is sold.

Short payoff is usually only an option for borrowers who are current with their mortgage payments and have good credit. It saves money and does not harm your credit score.

Settling Unsecured Debt

Any unsecured debt may be eligible for settlement, a debt-reduction strategy aimed at reducing the total amount you owe. It is a useful strategy for individuals who find themselves with more debt than they can handle and want to get their finances back on track. It is often done with the help of a debt settlement specialist, who can speak to your creditors on your behalf and often negotiate reduced balances.

Al Krulick

Al is an award-winning journalist with dozens of years of writing experience. He served as a drama critic, high school teacher, arts administrator, theatrical producer and director. He also dabbled in politics, running twice for a seat on the U.S. House of Representatives for Florida. Al is a Certified Debt Specialist with the International Association of Professional Debt Arbitrators and specializes in real estate, credit and bankruptcy advice.

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