Two main types of debts exist; one is an unsecured debt in which the creditor does not take out collateral on the loan and has no special right to an individual's property if a borrower defaults on his debt obligation. The other is secured debt, in which the creditor -- in this case, the secured party creditor -- has a right to seize certain pieces of pre-specified property if the borrower defaults. These creditors have several disadvantages to the buyer.
Setting up a contract in which one party is allowed to seize a particular piece of property from another party is rather complicated. While a simple, unsecured loan contract is relatively unsophisticated, a contract in which a secured party creditor is involved can be much more complex. This raises the possibility that the contract will be disputed at a later date or that it will be incorrectly drafted.
Potential to Lose Property
Perhaps the biggest downside to a debtor in a secured party contract is that he stands to lose property if he defaults on the debt. Given that the contract gives the creditor express permission to seize one or more pieces of property in the event of late payment, the debtor stands a chance of not just being sued, but losing assets.
When a person has a secured party creditor and is late on a payment, he will generally not simply roll over and allow the creditor to seize what the contract gives him the right to do. It is far more likely that the matter will end up in court. By contrast, while some debt contracts are confusing, others are simple and may be less likely to be litigated.
One of the main downsides of listing assets that a creditor can seize in the event of nonpayment is that the value of an asset often changes over time. This means the debtor may list an asset as collateral and see that asset appreciate in value during the life of the contract. If the debtor defaults, he may lose an asset with a value that outpaces the size of the debtor's debt.
- "The Complete Idiot's Guide to Getting Out of Debt"; Ken Clark; 2009