Learn more about how a secured creditor works, and how it’s different from an unsecured creditor.
Definition and Examples of a Secured Creditor
A secured creditor typically refers to a financial institution that issued a loan backed by collateral, so it has added protection if the borrower defaults on the loan. Collateral is the asset or property you use to secure the loan. If you fail to pay, the creditor has the legal right to take your collateral as satisfaction of the debt. Mortgages and auto loans are good examples of secured credit. For example, when you take out a mortgage, your home loan is the collateral. If you stop making your mortgage payments, your lender will contact you to try and collect the money you owe. If these attempts are unsuccessful, your lender can take possession of your home. Your lender will likely sell the home at auction in an attempt to recoup some of the money they lost when you defaulted on the mortgage. If you stop making payments on an auto loan, the same process will take place. Your car is the collateral, and if you fail to repay your loan, the lender can repossess your car.
How Does a Secured Creditor Work?
A secured loan is usually voluntary, which means a borrower agreed to pledge an asset as collateral for the loan. However, there are certain cases when it can be involuntary, such as in the case of a tax lien. When a taxing authority places a lien on your home, they’re laying a legal claim to it if you don’t pay your tax debts. If you default on a loan, a secured lender has options available for how to recoup the money lost. Since you agreed to put up collateral as a condition of the loan, a secured creditor has the right to seize the collateral and sell it at auction. A secured creditor also has more rights in a bankruptcy case. If you receive a bankruptcy discharge, it eliminates your liability to repay the debt, but it won’t remove the lien on your property. That means the lender can still foreclose on and repossess your property. If the borrower files for Chapter 7 bankruptcy, they can either give up the collateral or continue making payments on it. In Chapter 13 bankruptcy, the borrower may be able to retain the collateral and restructure their debt. However, the creditor is still entitled to payment on the collateral. So the only way to keep your home in a Chapter 13 bankruptcy is to make an arrangement and continue making payments on the debt.
Secured Creditor vs. Unsecured Creditor
In comparison, an unsecured creditor issues a loan without any collateral requirements. Credit cards and personal loans are examples of unsecured loans. If you default on the loan, your lender has fewer options for collecting on the money you owe them. Since they don’t have the option to seize any collateral, your lender has to take you to court and secure a judgment against you.
