An unsecured creditor can sue you for repayment. If the creditor receives a judgment lien, the creditor goes from being an unsecured creditor to a secured creditor. In some states, the newly secured creditor can force a sale of your home or other real estate you own. However, there are several reasons why the creditor is unlikely to do so.
Credit-card companies are unsecured creditors; they relied on your credit history for assurance that you would pay off balances. A lien is a legally enforceable claim against your assets. A lien granted by a judge is called a judgment lien. A secured creditor is one who extended a loan to you backed by some form of collateral. A car note is one example of a secured debt; a home mortgage is another. When you are badly behind on the mortgage payments on your home, the mortgage holder can foreclose -- or assume ownership of the home to sell it to repay the loan.
When a foreclosure sale is over, the mortgage lender receives all the proceeds except your equity in the home. Equity is the proportion of the loan that you have actually paid back. That equity, now transformed into cash, is distributed to all the secured and judgment creditors in order from the oldest debts to the newest. If there isn't enough equity to go around, the newest creditors are left empty-handed. A creditor won't force a sale unless you have enough equity in the home to pay all the secured debts and the judgment lien too.
Bankruptcy exemptions discourage creditors from forcing the sale of your home. All states allow for specific amounts of property -- usually stated in dollars -- that a creditor cannot seize if you go bankrupt. This bubble of asset protection is called the homestead exemption, and it includes part or all of your home's equity. Exemptions range from $5,000 for an individual in Alabama to your entire primary home plus acreage in Iowa, Florida, Kansas and Texas. Instead of dealing with exemptions, creditors may wait until you try to sell or refinance the home, or until you die, when they may get money from your estate.
Unsecured Creditors' Options
Generally speaking, it is easier for a creditor to garnish your wages than to force the sale of your home. Garnishment means a creditor gets part of your paycheck. You don't pay outright; the money goes directly from your employer to the creditor. Your garnishment is usually up to 25 percent of your wages above a specific dollar amount that varies by state, but it can be a much higher percentage of your income if you owe money for child support.
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- Secured Debt vs. Unsecured Debt