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What are some drawbacks to secure debt?

Secure debt is any debt that is secured by collateral. Collateral is something that the lender has a right to liquidate to pay off a debt that you do not pay as agreed. If you finance a car purchase, for example, the loan is secured by the car itself. The bank can repossess the car if you don't make your payments, and that's the drawback of this type of debt.

Other types of secured debt can include mortgages and rent-to-own type appliance or furniture purchases. While most people can't go through life without dealing with some type of secured debt -- especially with regard to homes or cars -- many financial experts will tell you that it can be a mistake to turn unsecured debt into secured debt.

Unsecured debt becomes secured when you tie it to collateral. Other financial commentators might encourage people to leverage equity in their home to pay off high-interest debt. The thinking is that you can take out a home equity line of credit or a second mortgage at a much lower interest rate than credit cards or other revolving accounts usually offer. It's worth it, say some financial advisers, because you save a lot on interest and reduce the overall cost of your debt.

While that might be true, converting unsecured debt to secured debt creates extra risk. Credit card companies can sue you if you are unable to make payment, and that could mean they end up with the ability to garnish wages or levy bank accounts. If you tie the debt to your home, though, the creditor now has the power to potentially take your home if you can't pay them.

If you do find yourself in such a situation -- whether your debt is secured or unsecured -- talk to a bankruptcy attorney as soon as possible. While both types of debt have to be treated differently, they can be included in bankruptcy, and in many cases you can even keep your home.

Source: The Balance, "Should I Turn Unsecured Debt to Secured Debt?," Miriam Caldwell, accessed March 10, 2017

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