The Short Answer
A security interest means a creditor has a legal claim on a specific piece of your property — called collateral — to back up the money they lent you. If you stop making payments, they have the right to take that property back. Common examples include your car loan (the lender can repossess the vehicle) and your mortgage (the lender can foreclose on your home). Debts without collateral attached — like most credit cards and medical bills — are called unsecured debts, and creditors have no specific property to seize if you don't pay.
When you obtain a loan, in most cases the lender does not want to just give you the money, they want to make sure that you have some sort of incentive to make sure you make your payments. What better incentive is there than taking away your property if you do not pay? Therefore, creditors normally want something as collateral to ensure you repay the money they lent you; they are taking a secured interest in your property and the debt you owe them is a secured debt.
There are many different cases of secured interest. You can go to a dealership and purchase a vehicle, the lender then has a secured interest, the car that you just purchased. If you decide to no longer keep making your car payment the lender can simply come and pick up or repossess the vehicle. Put it up for auction and recoup their money. You buy a home, for whatever reasons, you no longer make the payments, then the mortgage company is going to come and foreclose (take your home back) on your property. If you go to Best Buy and get a new TV, even though you don’t sit in their office and sign a promissory note like you do on your vehicle; that credit card you used to make the purchase acts the same. Best Buy still has a secured interest on their goods (the TV that you purchased). This is what’s called a purchase money security interest.
Most debts are unsecured debts. Meaning they do not have a security interest. Most credit cards, medical bills and personal loans are without you putting collateral up for the debt. However, you know a debt is secured if you have property the creditor can come and get if you do not pay the debt.
Companies have rights just as consumers do in order to protect themselves, when you purchase something whether it be a car, a home, jewelry or furniture, companies need to know they will recover the money due to them and, therefore, use collateral as a secured interest. If you cannot make the payments, they can recover the collateral and try to sell it to recover the amount they loaned you.
Key Takeaways
- A secured debt is tied to a specific piece of property the creditor can take back if you default on the loan.
- Car loans and mortgages are the most common secured debts — the vehicle and the home themselves serve as the collateral.
- A purchase money security interest means the store or lender has a claim on the exact item you bought, even on a retail credit card.
- Most credit cards, medical bills, and personal loans are unsecured — there is no collateral attached, so the creditor cannot simply repossess your property.
- Knowing whether a debt is secured or unsecured matters greatly in bankruptcy, because each type is treated differently under the law.
Attorney Insight
The mistake I see most often is people assuming that because North Carolina doesn't allow wage garnishment by most private creditors, unsecured creditors are powerless — and that's mostly true. But the moment a debt is secured, the rules change completely: that creditor doesn't need a court judgment to act, they just need you to miss payments. In Chapter 13 cases, we can sometimes strip off a second mortgage or reduce a car loan balance down to the vehicle's actual value, which is one of the most powerful tools available for clients with secured debts they're struggling to manage.
