Secured vs. Unsecured Debt

• Secured debt uses collateral to approve a loan or credit. If you fail to make your payments, the item can be taken to settle your debt. Common secured loans are home mortgages and car loans. These generally have lower interest rates because they are less risky to lenders than those that are unsecured. An unsecured loan is one that is not backed by anything. Most credit cards are unsecured. However, if you default on your payment for an unsecured loan, creditors still will want to seize any valuable assets that you may have to pay back the debt.
  
  

Creditor Liens

• If you fail to pay your creditors, they may take you to court and sue you in an attempt to force payment of the debt. If you legitimately owe the money, you can have a judgment placed against you. This allows your creditors to seize your assets to pay back the loan. Your wages can be garnished and liens can be placed on your property and bank account. Your bank account will be frozen up to the amount of your debt, so you won't be able to withdraw your money. After a 21-day waiting period, your creditor will be paid what you owe from your bank account, even if it is the entire balance. The judgment against you can stay on your credit report for seven years. However, some of your assets are protected against creditor liens. Your welfare, pension, unemployment and child support checks cannot be garnished for unsecured debt repayment.
  
  

IRS Liens

• Unlike liens used by creditors, the IRS may place a lien on your assets for unpaid income taxes, and a court judgment is not necessary. When a Notice of Federal Tax Lien is filed, the government has the legal right to claim property that allows it to collect the debt. First you are sent notice of the money you owe and then the IRS formally demands payment from you. If you do not respond within 10 days, then a lien may be placed on your bank account. Not paying the IRS can result in the issuance of a levy, which takes possession of your assets as payment.
  
  

Options

• It's best to contact a creditor or the IRS before collections escalate into a court judgment and lien. If you receive a letter demanding payment from the IRS, don't ignore it. If you owe you creditors a large sum that you will not be able to pay off, call and ask to negotiate a settlement of your debt. You may be able to pay a fraction of what you owe to erase the debt. If you are not able to come to a reasonable agreement with your creditor, your only choice may be file for bankruptcy. However, your tax debt may be exempt from discharge in a bankruptcy proceeding, but it may force the IRS to allow a payment plan to satisfy your debt.