What Is a Secured Debt?

Learn about secured debts and how creditors can collect them.

What will happen to a debt in Chapter 7 or Chapter 13 bankruptcy, including whether a creditor can still collect it after the case ends, will depend largely on whether a debt is secured or unsecured. This article will help you learn how to distinguish between the two types.

The Definition of a Secured Debt

A secured debt is:

  • an obligation that you owe, and
  • backed by collateral that a creditor can recover if you default (fail to follow the contract terms, such as making the required payments).

A secured debt is created with a lien. A lien can be voluntary or involuntary. Home mortgages and car loans are examples of secured debts that you incur voluntarily. A real property tax lien, by contrast, would be an involuntary lien.

Voluntary Liens

Usually, you voluntarily agree to give a creditor a security interest in your property. For instance, as a condition for making a home loan, a lender will typically require you to sign a mortgage (or in some states, a deed of trust). A mortgage or deed of trust is an agreement that grants a lender a security interest, or lien, against real property. It's the lien that allows for a foreclosure auction if the homeowner falls behind on the monthly payment.

You also can grant a lender a lien against personal property, which is anything that you own or have an interest in that isn't real estate (real property). Personal property includes such things as vehicles, equipment, furniture, tools, inventory, shares of stock, other types of investment interests, and even cash.

Typically, the way you grant a lien against personal property is through a security agreement. Before extending a new car loan, for example, a lender will require you to sign a security agreement that grants it a lien against the vehicle that you are buying. It's the voluntarily lien that allows the lender to repossess your car if you don't pay as agreed.

Involuntary Liens

Involuntary liens are security interests imposed against your property by a state or federal statute or through a court order. No agreement is involved. Involuntary liens include:

How a Creditor "Perfects" a Lien

One of the steps that a secured creditor must take to protect its right to collect is to perfect its lien. Perfection is a legal term that refers to the action required to give other creditors and interested parties notice of a lien or security interest.




Tangible personal property. Security interests in most tangible personal property—like equipment, furniture, tools, goods and materials—are perfected by filing financing statements. A financing statement is a document that identifies the borrower, lender, and collateral for a secured debt. Unlike security agreements, financing statements do not have to signed to be effective. A creditor can file a financing statement as long as you have signed the security agreement for the collateral that it is supposed to cover. In most states, financing statements are filed with the secretary of state.

Perfecting a lien is a critical step for any creditor. In some cases, borrowers grant liens against the same property—like your home—to multiple creditors. Take, for example, a home equity line of credit, which is usually junior to the mortgage that you took out to buy your house. A junior lien, like a home equity line of credit, can, in effect, move up in priority if the holder of the first mortgage fails to perfect its interest.

In bankruptcy, the consequences of a lender's failure to perfect a lien can be even more serious. If you file bankruptcy, the court has the power to set aside a lien that has not been properly perfected. A lien that is set aside is treated as if it never existed in the first place—meaning that the lender becomes an unsecured creditor. (To learn what happens to unsecured debt in Chapter 7 and 13 bankruptcy, see What Happens to Liens in a Chapter 7 Bankruptcy and Your Debts in Chapter 13 Bankruptcy.)

How a Creditor Can Collect a Secured Debt






Getting Help

If you’re struggling financially and want to learn about different ways to manage your debts, like by negotiating settlements or filing bankruptcy, consider talking to a debt settlement lawyer or a bankruptcy lawyer.

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