Why it is a bad idea to use secured debts to pay unsecured debts

On Behalf of | Feb 1, 2024 | Bankruptcy |

Unsecured debts include credit card and medical bills. To pay these expenses, people sometimes take on secured debts.

While the desire for relief is understandable, this path is extremely risky.

Risking valuable assets

In North Carolina, the average credit card balance is $5,832. At first glance, using secured debts, such as home equity loans or car loans, to settle unsecured debts may seem like a quick fix. The prospect of consolidating debts into a single, more manageable payment can be enticing. However, the apparent ease of this approach often masks its potential consequences.

Secured debts connect to specific assets, such as homes or vehicles, which serve as collateral. By using these assets to pay off unsecured debts, individuals put their homes and vehicles at risk. Failing to meet payments on the new secured debt could lead to foreclosure or repossession.

Creating a cycle

Relying on secured debts to address unsecured obligations can create a cycle. The immediate relief might quickly give way to the long-term repercussions. Without addressing the root causes of financial issues, individuals risk perpetuating a cycle of borrowing against their assets without achieving genuine financial stability.

Affecting bankruptcy proceedings

If a bankruptcy filing occurs, the choice to use secured debts to settle unsecured obligations can have significant implications. Bankruptcy laws in North Carolina aim to provide a fresh start, but the use of secured debts may complicate matters. The assets tied to these debts may not get full protection in bankruptcy proceedings. This can expose individuals to potential loss.

Understanding the long-term consequences of financial decisions is important for making informed choices and achieving stability.