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I am thinking of a simple case.

For example, suppose I bought a home, but there is a mortgage where the contract stipulates that if I default, the bank can seize up to 95% of the home value. This 95% is a hypothetical situation, so please bear with me.

I also have a credit card debt.

  1. If I default on both obligations and have access to 5% of the home value, does the credit card company collect debt through this unencumbered portion (i.e. 5%)?

  2. If this is the case, isn't it reasonable to say that unsecured debts have implicit collateral? In the hypothetical example, even though my credit card debt is considered "unsecured" debt, because the credit card company can come after my unencumbered portion (i.e. 5%, the part of my asset that is not collateralized to secured-debt creditors), in effect, the unsecured-debt creditors do have collateral as well?

I ask this, because I think of unsecured debt as something without a collateral. But, in reality, the unsecured-debt creditors can come after any unencumbered asset that does not have senior creditor's priority claim (e.g. usually secured-debt creditors). So, one could think of unsecured debts also have implicit collateral?

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  • I mean, at the end of the day, isn't everything you own collateral by some stretch of the definition? Mar 25 at 13:44
  • @GregoryCurrie: There often is law or jurisprudence which excludes essential property, such as basic household items.
    – MSalters
    Mar 25 at 14:27
  • @GregoryCurrie Hi Greg, yeah, that is exactly the point of my question... Mar 25 at 23:48
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No

An unsecured debtor can seek to recover through various ways including seeking court orders to garnishee wages or bank accounts, have the state seize personal assets and sell them or ultimately force the creditor into bankruptcy.

A secured debtor can do all of those things but also has the right under law to seize the collateral and dispose of it to get their money.

In your example, the mortgagee can foreclose, sell the property, keep what its owed and give the balance to the creditor. This may have the result of providing liquid assets that the credit card company can seek to seize but they can take the real estate directly.

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  • Thank you for your response, and this is quite helpful! Mar 25 at 23:25
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even though my credit card debt is considered "unsecured" debt, because the credit card company can come after my unencumbered portion (i.e. 5%, the part of my asset that is not collateralized to secured-debt creditors), in effect, the unsecured-debt creditors do have collateral as well?

The difference is that your mortgage company will have a collateral to collect from if you default the secured debt.

The credit card company will not know, at the moment of giving you the loan, if you will have anything left to collect from when you default.

You are setting up a very specific scenario to advance your "theory". But that scenario does not cover all the possibilities.

  • Maybe the mortgage company gets 100% of the value of your home.

  • Maybe you are left with $10,000 and your unsecured debt is $1,000,000.

  • Maybe you have two unsecured debts, the first debtor get their money but the second one does not.

  • Maybe you get the money, pocket it and spend all of it in a big party.

  • Maybe you get the money and run away with it.

  • ...

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  • Juan, you cover various scenarios that are quite relevant to my hypothetical situation. Thank you!!! Mar 25 at 23:25
  • So, Juan, would you agree with the claim that unsecured debts do have implicit collaterals besides the fact that unsecured creditors do not know how much asset you have? But, to a certain extent, when you apply for a credit card, you do fill out your tangible asset information, annual income, profession, your social to run through the credit score, etc. So you're right in that it isn't perfectly known in advance, but the debtor's information is somewhat revealed. Mar 25 at 23:29

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