Fully vs. Partially Secured Creditors: Understanding Your Debt Obligations

If you default on a car loan, the fully secured lender will sell your car.

When filing for bankruptcy or attempting to consolidate your debt, you will hear a lot of discussion about your creditors and their classifications. A creditor's classification determines the steps he can take to collect his debt as well as his role in creating a bankruptcy plan. You can classify all creditors as unsecured, partially secured or fully secured.

Fully Secured Creditor

A fully secured creditor is a lender who secures his debt with collateral, such as a mortgage or a lien on personal property. If you default on debt you owe to a fully secured creditor, the creditor can take possession of the property securing the loan and sell it to pay the difference. Lenders of home loans and car loans are some of the most common fully secured creditors.

Partially Secured Creditor

When a creditor only has collateral for a portion of the debt you owe to him, he is a partially secured creditor. Some partially secured creditors may have requested collateral that they knew would only cover some of the debt while others may have secured their loans with collateral that dropped in value, such as real property.

Unsecured Creditor

Unsecured creditors are lenders who don't have any collateral to secure their debts. If you default on your loan from an unsecured creditor, the creditor can't seize any collateral to repay the debt. Instead, he must obtain a judgment and a writ of execution before he can collect your assets or wages. Because unsecured loans are more risky, unsecured creditors often impose higher interest rates on the money you borrow.

Implications

The classification of a creditor determines how the court treats him in bankruptcy proceedings. For example, if you file chapter 13 bankruptcy, the court typically divides your partially secured creditors' claims into secured and unsecured portions. You must pay your secured debts in full with interest while the court will typically allow you to pay unsecured creditors only what you can afford. However, the court may give some unsecured debts, such as delinquent tax, child support or alimony, priority over other unsecured claims.