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 can't take any of your property without first suing you and getting a court judgment (subject to a few exceptions).
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 include:
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).
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 can't seize any of your assets without a court judgment. (If you're having financial troubles, see When You Can't Pay Your Bills: Things to Know and Options for Dealing With Your Debt.)
To obtain a judgment, a creditor must file a complaint in state or federal court and serve you with a copy, which 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.
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:
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 can't 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.
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.
If you’re struggling financially and want to learn about different ways to manage your debts, like by negotiating settlements or filing bankruptcy, consider talking to a debt settlement lawyer or a bankruptcy lawyer.