Secured and Unsecured Debt Collection

What is secured debt?

The meaning of a secured debt is that the debt is tied to the ownership of property by a debtor. If the debtor defaults on the payment of a secured debt, the property or asset which is being used as security can be sold in order to meet the outstanding amount of debt repayments. The most common example of a secured debt is a mortgage which means that if you are unable to repay a debt, the person or legal entity holding the mortgage can sell the security asset in order to realise the value of the loan repayments. Sometimes, debt security will be given over household items like cars, boats, furniture or even simple personal possessions.

What are some examples of types of security?

Some of the types of security which can be offered in relation to debts like this are fixed and/or floating charges over the assets of a company which are normally lodged at the Australian Securities and Investments Commission and naturally mortgages which are lodged at the department of land and property information in New South Wales. Also, sometimes it is possible to offer security in the form of a car by allowing a registered security interest to appear on the title to the vehicle.

What is unsecured debt?

Unsecured debt is a loan where in the event of repayment failure, there is no recourse for the lender to repossess any assets or have any form of loan security. Lenders who take on the practice of giving unsecured loans generally do so at much higher levels of risk on the transaction. They normally charge this risk to the end consumer in the form of much higher interest rates on the loan. A good example of an unsecured debt is the debt which we accumulate on credit cards. If you fail to repay your credit card debt, there is no security property against which the debt can be repaid through the sale of an asset in a legal sense.

What is the difference between secured and unsecured debt collection?

The difference between secured and unsecured debt collection is that if you are the creditor in relation to a debt that is secured, there will be an asset which can be sold in order to realise the value of the debt. So, if you have loaned some money to someone and given them security over the property in the form of a mortgage you can sell the house under the mortgagee power of sale to any buyer. In this situation it is not necessary to go through the standard process of debt collection because the property can be sold under the mortgagee’s power of sale.

What about the preference between secured and unsecured creditors?

When a company goes into liquidation or an individual goes bankrupt, there will often be a long line of creditors who are owed money and each seek a claim in relation to the assets of the individual or the company which is left. Because the debts will exceed the amount of the assets of the legal entity, it will mean that not everyone can be paid and secured creditors will be able to establish their position with a claim over the assets to a much greater degree than the unsecured creditors who are owed money by the entity which is being liquidated or the person who is being made bankrupt.