Differentiating Secured And Unsecured Debt

Differentiating Secured And Unsecured Debt "Secured debts differ from unsecured debts in that the obligation of the debtor to repay the secured debt is ""secured"" by a lien on specific property of the debtor granted to the lender. A deed of trust, which gives a lender the right to foreclose on a property if the debtor fails to pay their mortgage, and a lien placed on an automobile's title, which gives the lender the right to repossess the vehicle, are two common examples. In contrast to an unsecured debt, if the debtor fails to pay, the secured lender may be able to seize the collateral to satisfy the debt. In practice, if the debtor fails to repay the secured debt, the secured lender will sell the collateral and apply the proceeds to the debt. A secured lender is in a stronger position than an unsecured lender because the secured lender has both the right to pursue legal action against the debtor and a claim against the pledged property if the debtor defaults.While the secured lender has an interest in the collateral, this interest does not equate to ownership or a possessory interest. Instead, the lender has a lien against the property pledged. Therefore, the lender does not acquire ownership of the property once a security interest is granted. The debtor retains ownership, but this ownership is now burdened by the lender's interest. Only upon the debtor's default is the lender authorized to take action to revoke the debtor's ownership and sell or take possession of the property.By contract or by operation of law, secured debts are created. As mentioned previously, a deed of trust is an example of a secured debt that results from a contract. The secured lender provides the debtor with the funds to purchase a home in exchange for the debtor's pledge to repay the funds and the debtor's grant of a security interest in the home. When a judgment attaches to real property, for example, a security interest is created by operation of law. If a judgment is granted against a debtor who possesses real property, the judgment can attach to the debtor's property interest even if the judgment is unrelated to the real property. Attachment transforms the judgment into a claim on the property. In Virginia, a judgment must be docketed with the Circuit Court Clerk's Office in the jurisdiction where the debtor possesses real property for it to attach. Thus, an unsecured debt reduced to judgment may become secured if the debtor possesses real property and the judgment is properly docketed.
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