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The primary difference between unsecured and secured debt lies in whether the debt is backed by collateral.

Secured Debts
These are tied to a specific asset that serves as collateral. If the borrower defaults on the payments, the creditor can take possession of the asset to recover their losses. Common examples include car loans and home mortgages. If you fail to pay your car loan, the lender can repossess the vehicle. Similarly, a mortgage default can result in the foreclosure of your home.

Unsecured Debts
These debts are not backed by any tangible asset. If the borrower defaults, the creditor does not have a specific item to repossess. Examples include credit card debt, student loans, and medical bills. Unlike secured debts, creditors of unsecured loans rely on legal measures like lawsuits to recover the owed money.

This distinction also affects how debts are treated in bankruptcy. Creditors holding secured debts have priority because they can claim the collateral, while unsecured creditors are less likely to recover the full amount owed.

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