Just about everyone in America has, at one time or another, borrowed money. Whether it’s a loan to pay for a college education, a new car, using a credit card, or a mortgage for a new home, people enter into a debtor-creditor relationship in this country every day.
When a person is in the process of obtaining a loan, the person asking for the money is generally referred to as the “borrower,” while the bank, credit union, or other person or entity with the money is known as the “lender.” However, once the borrower signs on the dotted line, they become a “debtor,” owing the “creditor” the amount they borrowed and, usually, interest – the debt.
There are two types of debt a person can owe – secured and unsecured. Secured debts are generally governed by the Uniform Commercial Code, which is found in state statutory law. In order for a debt to be “secured,” a borrower must pledge “collateral,” when they take out the loan. The collateral operates to secure the debt so that, if the borrower fails to repay the debt owed, the lender can take possession of and title to the pledged collateral and use its value to offset the loss from the unpaid loan. The act of securing the debt is generally performed by the borrower and lender entering into a security agreement, which is often done at the same time the borrower signs the promissory note on the loan. Once the security agreement is executed and in place, the lender has a “security interest” in the collateral. However, the lender generally has to file a “financing statement” or take some other action in order to “perfect” their security interest, which gives them a preferential right to the collateral, should it be used as collateral for another loan. The most common types of secured debts are mortgages and vehicle loans.
Unsecured debts are also governed, to some extent, by statutory law. In an unsecured debt situation, the lender or creditor does not have a right to any specific collateral, so if the debtor defaults, or doesn’t pay on the loan, the creditor is forced to use other means to offset the loss of the unpaid loan. This often is accomplished through the creditor obtaining a judgment against the debtor for the unpaid amount and then “executing” on the judgment, using various tools available to satisfy the debt, such as garnishing the debtor’s wages or filing a lien against the debtor’s real estate or other assets. The most common types of unsecured debt are credit cards and student loans.
The difference between secured and unsecured debt has its greatest importance when a debtor, realizing they cannot pay all their debts, files a petition for bankruptcy, which is a process governed by federal law in the federal court system. Bankruptcy does not always have to be the only option for a debtor, and foreclosure doesn’t always have to be the only option for a creditor.
Our firm has represented creditors and debtors in a wide variety of debt situations, a number of which have been resolved without extensive and expensive litigation. If you’re a debtor or a creditor facing a problem with a particular debt or multiple debts, our staff and attorneys are here to assist you in finding a satisfactory resolution to your problem.