Almost every consumer in America today owes some money to someone else on an "extended credit program." Extended credit makes it possible for consumers to start businesses as well as purchase items from people, merchants or companies with no money out of pocket. There are two basic types of consumer debt, secured debt and unsecured debt.

Secured consumer debt is debt that is tied to a specific piece of real or personal property. The most common secured debts are "homes and automobiles." A home or car is considered the property that you will put up for collateral to the lender for the amount of money you plan to borrow which guarantees repayment of the debt.

Let's say that you are applying for a line-of-credit at your local bank for $20,000. As part of your line-of-credit approval you will have to put up your house as collateral to "secure" the repayment of the $20,000. Your line-of-credit is now secured by your property (home). If for any reason you experience financial troubles and you cannot pay the bank your agreed upon monthly payment, the bank can take the collateral property (home) and sell it to pay the balance you owe on the line-of-credit.

If you have no credit history or a bad credit history then securing a loan with your property is sometimes the only way possible. Secured debts usually have structured payment amounts and terms. In addition, you can usually obtain lower rates if your credit is good. The downside to a secured loan is that you can lose your property if you cannot repay the loan. In addition, if you file bankruptcy against your unpaid secured loan your property will be included in the bankruptcy. On secured debt the only way to win is to repay the loan in full.

Unsecured consumer debt is debt that is not tied to a specific piece of property. The most common unsecured debts are "credit cards and medical bills." When you use a credit card to purchase items or see a doctor for medical attention there is no property to take from you if you don't pay the creditor or hospital.

Let's say you have been approved for a credit card with a spending limit of $5,000. You activated the card and began purchasing items (furniture, cloths, jewelry, etc) with that card. The minute you purchased any item with that credit card the card created an unsecured debt. The card is considered unsecured because: (1) it was issued to you based on your credit and payment history and (2) there is no property securing your purchases. If for any reason you cannot make payments to the credit card company, the credit card company must resort to: (1) send you to collections, where a collection agency tries to collect from you, or (2) sue you in court and convince the judge to grant them a judgment against you for the amount you owe them. Once a judgment has been granted, the credit card company may be able to garnish your wages (up to 25%) depending on the State law.

Unsecured debt can only be obtained by having an average to good credit rating (FICO score) and payment history. Unlike secured debt, unsecured debt usually comes with flexible payment amounts and terms and credit limits. If you cannot pay your unsecured debts (credit cards, medical bills, etc) these debts often may be released in bankruptcy. Overspending on credit cards is the leading cause of uncollected unsecured debt.