In other words, there is no specific property or asset the lender can claim if the borrower fails to make payments. Instead, unsecured debt is based on the borrower's creditworthiness, income, and willingness to repay.
If the borrower defaults on the loan, the lender's recourse is typically limited to legal action, rather than seizing an asset used as collateral.
In the context of a deceased person's Estate, unsecured debt is typically:
Credit Card Debt: Credit card balances are considered unsecured debt. If the deceased did not pay their credit card bills, the credit card company cannot automatically seize property from the deceased's estate.
Personal Loans: Loans obtained from banks, credit unions, or online lenders that are not backed by collateral are unsecured loans.
Medical Bills: Medical expenses that the deceased owes to a hospital or healthcare provider are typically considered unsecured debt. These bills are based on services provided and not tied to specific assets.
Student Loans (in most cases): While federal student loans are typically unsecured debt, they have unique characteristics and may be considered differently.
Unpaid Utility Bills: Debts owed to utility companies, such as electricity or phone bills, are generally considered unsecured.
After a death, unsecured debt is treated differently than Secured Debt:
Instead, unsecured debt is paid from the deceased's estate before remaining assets can be distributed to beneficiaries.
The order in which creditors get paid varies based on local laws and the specifics of the estate, but Secured Debt is typically given priority over unsecured debt. However, probate laws differ in each state and and regulations can vary.
If the deceased's estate lacks sufficient funds pay the unsecured debt, or beneficiaries are unable to pay it themselves, then Creditors may have the right to pursue legal remedies to recover the remaining balance.
Outstanding debt can be challenging to navigate and so it's advisable to consult with an Estate Attorney or Probate Attorney to help navigate the process and ensure that applicable laws are adhered to.