Distinguishing between secured and unsecured debt

A secured debt is a debt that you collateralized with an asset that you own. (The asset is often referred to as your collateral.) When you collateralize a debt, the lender puts a lien on that asset, which gives the lender the legal right to take the asset if you fall behind on your payments. For example, if you have a mortgage loan, your lender has a lien on your home. If you have a car loan, the lender has a lien on your vehicle.

A lot of your debt, like credit card debt, is probably unsecured, which means that the creditors do not have liens on any of your assets. If you don't pay an unsecured debt, the creditor will try to get you to pay up. If you don't, the creditor may bring a debt collector on board to try to get your money. If you still don't pay, the creditor must sue you to get the court's permission to try to collect what you owe. The creditor can ask the court for permission to Seize one of your assets.

Put a lien on an asset so you can't borrow against it or sell it without paying your debt. Garnish your wages (take a portion of them each pay period), assuming that wage garnishment is legal in your state.

Knowing when to prioritize an unsecured debt

Depending on your circumstances, you'll want to treat certain unsecured debts as top priorities, given the potential consequences of not paying them. These unsecured debts deserve priority treatment: Child support, especially if it's court ordered. Federal income taxes. Uncle Sam has almost unlimited powers to col- lect past-due tax debts.

State income taxes. If you don't pay these taxes, your state can sue you, garnish your wages, or seize your property. Property taxes and homeowner's insurance, if these expenses aren't included in your mortgage payments. When you don't pay your prop- erty taxes, the taxing authority will eventually take your home. If your homeowner's insurance gets cancelled for nonpayment, your lender will buy insurance for you, but the insurance will be very expensive, so the total amount of your monthly mortgage payments will increase.