Understanding Secured versus Unsecured Debt

Summary:  In order to properly plan, must understand the difference between secured debt and unsecured debt. You must understand the legal claim of repossession based on secured debt and your right to eliminate unsecured debt.

There is a Big Difference in Colorado Between Secured and Unsecured Bills

When you have financial problems, you must understand the difference between secured debt and unsecured debt in Colorado. Because your legal options depend on your understanding the difference.

A secured debt is a debt which is secured by a lien on property. Such as a home loan where the loan is secured by a lien on the home. Or such as a lien on a car title, when the car is purchased with a loan.

The lender or creditor’s right to claim your property if you do not pay is known as a lien. If you own property that has a lien against it, you cannot sell it or transfer the ownership of the property without paying the loan off.

If a secured debt is not paid, then the lender can repossess the collateral and sell it. The sales proceeds are used to pay off the loan. If the sale price is less than the loan payoff, then the lender can sue the borrower in court and obtain a deficiency judgment. The debtor’s other property may be levied on in order to pay the deficiency judgment. And the debtor’s wages can be garnished, up to 25% of take home pay.

Consensual and Nonconsensual Colorado Liens

A home loan secured by a deed of trust and a car loan secured by a lien on the car title are examples of consensual liens. The lien was placed on your property with your consent.

A nonconsensual lien is one where you did not agree to the lien, but a creditor has created the lien because you did not pay the lender on an unsecured debt. An example is a judgment lien. A court judgment recorded in the county clerk and recorder’s records becomes a lien on any real estate within that county. The judgment can be foreclosed and the property sold to pay the judgment, as long as there is enough equity in the property to satisfy the judgment.

Other examples of nonconsensual liens are tax liens, a lien for unpaid HOA dues, and mechanics liens.

No matter what type of lien is on your property, the legal effect is the same. Your property can be sold in order to pay the debt.

In contrast, if the debt is unsecured, then the lender has nothing to sell if the loan is not paid. Instead, the lender must obtain a judgment in court and then pursue collection on the judgment.