Unsecured vs. Secured Debt: Risks of Backing Credit Card Debt With Assets

Credit card debt is usually unsecured, meaning the creditor does not automatically have a claim to your home. That can change if you voluntarily use real estate as collateral. By granting a creditor a lien or mortgage interest in your property, you may give that creditor additional rights and create the possibility of foreclosure if the secured obligation goes unpaid.

When bills pile up, securing debt with your home may seem like a way to get better terms or bring an existing balance under control. The paperwork, however, can do more than change the interest rate or monthly payment. It can change what the creditor has to lose if you cannot pay and, more importantly, what you have to lose.

For advice about your specific situation, contact a debtor’s rights lawyer.

What Is the Difference Between Unsecured and Secured Debt?

The biggest difference between secured and unsecured debt is collateral. With a secured loan, you agree that a valuable asset backs the debt. A mortgage loan uses your home as collateral. An auto loan uses the vehicle. If you don’t pay the car loan, the lender may repossess the vehicle or take other steps to enforce its rights against the collateral.

Unsecured debt doesn’t work that way. Credit cards are a familiar example. However, personal loans and federal student loans can also be unsecured. The creditor still has a legal claim against you for the money you owe. However, you don’t pledge a specific asset as security for the debt.

That difference matters when you apply for credit. Your credit score, creditworthiness, and debt-to-income ratio can affect whether a lender approves your application. These factors also impact the borrowing limits and annual percentage rate (APR) you receive.

A lender taking collateral has an additional layer of protection if the borrower defaults. For you, however, that protection comes with a price. The asset securing the debt can be at risk.

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How Can Credit Card Debt Become Secured by a Home?

A creditor can’t unilaterally secure outstanding credit card debt by attaching it to the debtor’s home. A credit card company doesn’t automatically get a claim against your house because you stop paying your credit card bill. The debtor would need to take active steps that tie the unsecured debt to collateral.

Unsecured debt can become tied to your home when you voluntarily use the home’s equity to pay it off. For example, you might take out a home equity line of credit (HELOC) to consolidate debt.

A HELOC provides funds you can use to pay credit card balances. The home secures the new debt. A home equity loan can work in much the same way. This can help some borrowers, especially when the new loan offers more manageable terms.

What Consumer Protections and Advantages Can Be Lost?

Unsecured debt gives a borrower an important advantage: no specific asset sits behind the debt as collateral. If your credit card balance remains unsecured, the creditor doesn’t have a lien on your home simply because you owe money.

Once you voluntarily secure that debt with real property, the creditor gains additional rights that can change your financial and legal position.

What Happens to the Secured Debt in Bankruptcy?

If you file bankruptcy after using your home to secure credit card debt, don’t assume the bankruptcy automatically removes the lien. Bankruptcy can discharge qualifying personal debts, but a valid security interest may survive.

If you want to keep the property, you may have to address the secured debt through the bankruptcy case or continue meeting the creditor’s requirements. How the court handles the debt depends on several factors.

The bankruptcy chapter, the property’s equity, and the repayment terms attached to the secured obligation can influence how the court handles the debt.

Collateralizing Credit Card Debt Can Create a Foreclosure Risk

When you use your home to secure debt, falling behind can put the property itself at risk. If you default on the loan, the lender may have enforcement rights under the security agreement and state law, including the ability to foreclose on the property under the right circumstances.

Foreclosure is a legal process. Specific requirements and processes vary by state. The lender may have to provide notices and satisfy other procedural requirements before completing a foreclosure. Still, the possibility of losing your home is a major change from the position you were in when the credit card debt was unsecured.

The Long-Term Consequences of Putting a Lien on Your Property

When you use a home as collateral, a lien is placed on the property’s title. That lien is recorded in official public records. It can remain attached to the property until the loan is fully repaid, released, satisfied, or otherwise resolved. That attachment can restrict the property owner.

The owner will likely need to resolve a lien before selling the property. An existing lien can affect the owner’s ability to secure future financing. An existing lien may have priority over future lenders, depending on recording statutes, lien terms, and any subordination agreement, which can make a future lender more hesitant to approve a new loan.

Talk to a Lawyer

Using your home to secure credit card debt can fundamentally change the consequences of missed payments. Before signing an agreement that gives a creditor an interest in your home or other real estate, an attorney can review the terms and explain what rights you may be giving up.

Use the Super Lawyers directory to find a qualified debtor’s rights lawyer who can help you evaluate your options before putting your property on the line.