Explanation of unsecured debt

Amounts owed to credit card companies, medical providers, merchants, vendors, and utility companies are typical unsecured liabilities. Simply put, the payment of these debts is not guaranteed by an interest in an asset. In contrast, secured liabilities are guaranteed by an interest in an asset. For example, the payment on a house mortgage is guaranteed by the house. If the debt is not paid, the mortgage assumes possession of the house to satisfy the debt. An unsecured creditor does not have this recourse.

The status of unsecured creditors

Unsecured creditors are vulnerable, being dependent only upon a promise to pay. In addition, their collection process is expensive. They are also behind other creditors in bankruptcy distributions.

Unsecured creditors will negotiate

The different status of unsecured creditors may make them willing to deal when a party or a couple is in financial distress. These deals can range from reductions in monthly payments, to elimination of interest, to settlement of the entire balance for a significantly discounted amount. These negotiations can materially reduce the debt that is actually owed by the marital estate. If the deals are made before the marital estate is valued and divided, then neither party is put at a financial disadvantage. However, it is also possible that one party may receive a large portion of the unsecured debt and also compensating assets. If that party is able to negotiate significant reductions in the debt, then he or she has received a larger portion of the marital estate than is equitable. Therefore, it is more equitable if the parties make what deals they can during the divorce process.