Learn about unsecured debts -- what they are and how creditors can collect on them.
An unsecured debt is an obligation or debt that does not have specific property (like your house or car) serving as collateral for payment of the debt. If you fail to make payment on an unsecured debt, the creditor cannot take any of your property without first suing you and getting a court judgment. (There are a few exceptions to this rule.)
A secured debt, on the other hand, has a piece of property serving as collateral for the debt. If you fail to make payments, the creditor can take the property.
Common Types of Unsecured Debts
Common types of unsecured debts include:
- most department store and other credit card charges
- student loans
- telephone, electric, and other utility bills (except to the extent that you are required to post a deposit)
- medical bills
- personal loans that you were not required to execute a security agreement or mortgage to obtain
- court judgments that have not yet been enforced through remedies such as garnishment or attachment
- income taxes (unless they are so seriously delinquent that they have gone into collection and become subject to a governmental lien), and
- back rent (except in states that allow landlord liens).
Most debts are unsecured. The primary exceptions are home and auto loans, which are almost always secured.
Advances on lines of credit can be unsecured claims. Some lines of credit are unsecured, backed only by your promise to repay advances taken against them. Obligations on home equity lines of credit, on the other hand, are typically secured claims (secured by your home).
What Happens If You Don't Pay an Unsecured Debt?
If you fail make payment on an unsecured debt, the creditor can contact you to try to obtain payment, report the delinquent debt to a credit reporting agency, or file a lawsuit against you. Generally, a nongovernmental, unsecured creditor cannot seize any of your assets without a court judgment.
How Unsecured Creditors Can Get a Court Judgment
To obtain a judgment, a creditor must file a complaint in state or federal court and serve you with a copy (this is the start of the lawsuit). You have the right to file an answer to the complaint and contest the lawsuit before a judgment can be entered.
Remedies Once the Creditor Has a Judgment
Once a creditor obtains a court judgment against you, it can proceed with collection remedies. Collection remedies and procedures are governed primarily by state law. A judgment creditor may, among other things:
- take your examination under oath to obtain information about your income, other obligations, and assets
- garnish your wages and bank accounts, and
- attach and sell real and personal property.
The percentage of your wages that can be garnished varies from state to state. State and federal law also exempt some real and personal property from collection. Creditors cannot garnish or collect from assets to the extent that they are covered by exemptions. Exemptions available to you may protect your home equity, household furniture, pension plans, and other items of property from your creditors' collection efforts.
Exceptions to the Court Judgment Rule
If you default on a federally-insured student loan, the Department of Education can garnish up to 15% of your disposable income without a court judgment. State and federal tax authorities also may undertake collection remedies without first going to court.