A secured debt is a debt that has a lien attached to the property. The property serves as the collateral to secure the debt. The property guarantees payment of the debt – if you don’t pay, the creditor is allowed to take the property. There are two kinds of secured debts: those you agree to, such as a mortgage, and those created without your consent, such as a lien the IRS has against your property because you haven’t paid your taxes.
Examples of liens you agree to:
- Home mortgages – if you fail to pay, the lender can foreclose
- Home equity loans (lines of credit) – if you fail to pay, the lender can foreclose
- Loans for cars, boats, motorcycles RVs – if you fail to pay, the lender can repossess
- Security interests in a major appliance – sometimes, if you buy on credit from a store (i.e., Sears), the store will print on the receipt: “retains a security interest in all hard goods” or the store may make you sign a security agreement when you use their credit card to purchase a hard goods. If you have bought an appliance or other hard good on credit with a lien or security interest attached to the property – you have agreed to let the item purchased serve as collateral for your repayment. If you fail to pay, the lender can repossess the item.
- Personal loans from banks or finance companies – Most of the time, if you take out a personal loan, you must pledge valuable personal property as collateral to secure the loan (i.e., paid off cars or motorcycles, tools or equipment).
Examples of liens you don’t agree to:
- Tax liens – Federal, state and local governments have the power to put a lien on your property if you owe back taxes (delinquent). Normally, the government must record a lien against your property or at least issue a notice of tax lien.
- Judicial liens – you have been sued and have had a judgment recorded against you.
- Statutory liens – mechanic’s lien or materialman’s lien (i.e., hired someone to work on your house or car and have not paid the debt).