Unsecured Debt

An unsecured debt is an obligation not backed by any lien on specific property. The lender advanced money against a promise, and if the promise is broken there is nothing to seize. Credit cards, medical bills, most personal loans, overdrafts, utility arrears and student loans are all unsecured; a mortgage or an auto loan is not.

The absence of collateral shapes everything downstream. Unsecured credit is priced higher, underwritten more on credit history than on assets, and enforced through the court system rather than against a thing. It is also the category bankruptcy handles best, because a discharge erases personal liability and there is no lien left behind to survive it.

Enforcement runs through a courtroom, and each step is separate. An unsecured creditor that wants to be paid over your objection has to sue, prove the debt, and obtain a judgment. Only then does it acquire the post-judgment tools people usually associate with debt collection: garnishing wages, levying a bank account, or recording a judgment lien against real property. That is the structural difference from secured lending, where the remedy exists from the day the loan is made.

Because the judgment comes first, the single most valuable thing anyone facing a lawsuit can know is procedural rather than financial. A defendant who does not respond to a summons generally loses by default, whatever the merits of the underlying claim.

Federal law caps ordinary wage garnishment, and the cap has two limbs. Under 15 USC 1673(a), the maximum part of disposable earnings subject to garnishment for any workweek is the lesser of 25 percent of those earnings, or the amount by which they exceed thirty times the federal minimum hourly wage. The second limb is what protects low earners: below that floor, nothing is garnishable at all. The Department of Labor prescribes the equivalent multiple for pay periods other than a week.

The definition of "disposable earnings" is narrower than it sounds, and it costs people money. 15 USC 1672(b) defines it as earnings remaining "after the deduction from those earnings of any amounts required by law to be withheld." Income tax and payroll tax withholding reduce the figure. A voluntary retirement plan contribution, a health premium paid by salary reduction, a credit union transfer and a charitable deduction do not. And "earnings" itself is broad: 1672(a) reaches compensation "whether denominated as wages, salary, commission, bonus, or otherwise", and expressly includes periodic payments from a pension or retirement program.

Three categories escape the 25 percent cap, and they are the ones that reach deepest. 15 USC 1673(b) removes the 25 percent limit for a support order, an order of a United States court with jurisdiction over a Chapter 13 case, and any debt due for a state or federal tax. For support, the substitute limits are 50 percent of disposable earnings where the individual is supporting another spouse or dependent child and 60 percent where they are not, rising to 55 and 65 percent respectively to the extent the garnishment enforces support for a period more than twelve weeks old. Federal student loans have their own administrative route with its own percentage and do not require a judgment at all.

Two protections are easy to miss. State law may be more generous than the federal cap and is not displaced by it: 15 USC 1677 preserves state laws prohibiting garnishment or providing more limited garnishment. And 15 USC 1674 makes it unlawful for an employer to fire an employee because their earnings have been garnished "for any one indebtedness", with a criminal penalty attached. Read the emphasis: the job protection covers the first debt, not the second.

In bankruptcy, unsecured claims are paid last and pro rata. General unsecured creditors share whatever is left after secured and priority claims, divided proportionally within their class (11 USC 726(b)). In a typical consumer Chapter 7 case that share is small or nothing, which is the practical reason unsecured debt is the category a discharge deals with most completely. The exceptions at 11 USC 523 still apply, so being unsecured does not make a tax debt, a support obligation or a student loan dischargeable.

You fall behind. The creditor collects internally, then refers or sells the account. If nothing is resolved, it sues before the limitation period expires, and a judgment lets it apply to garnish wages, levy an account, or attach a lien to property. Exempt income and exempt property are outside those tools, and what is exempt is largely a matter of state law.

A hypothetical example of the garnishment arithmetic. Desmond grosses $1,000 a week. Income tax and payroll taxes required by law come to $200, so his disposable earnings are $800. Note what does not come out first: his $75 weekly 401(k) contribution is voluntary, so it does not reduce the $800.

On an ordinary judgment for a credit card balance, the cap is 25 percent of $800, which is $200 a week. The statute's other limb, the amount by which $800 exceeds thirty times the federal minimum hourly wage, would govern instead if it produced a smaller figure, which is what shields someone earning much less than Desmond.

Change the debt and the answer changes completely. If the garnishment enforced a support order and Desmond supported no other spouse or child, up to 60 percent of disposable earnings could be taken, which is $480, rising to 65 percent, or $520, for arrears older than twelve weeks. Same paycheck, same employer, and more than double the exposure.

Pros

• No asset is pledged, so falling behind cannot directly cost you a house or a car.
• Enforcement requires a lawsuit and a judgment, which gives the borrower notice and an opportunity to defend or negotiate.
• Federal law caps ordinary wage garnishment, protects low earners outright through the minimum-wage limb, and forbids firing an employee over a first garnishment.
• It is the category bankruptcy handles most completely, since a discharge ends personal liability and no lien remains behind.

Cons

• It costs more. Without collateral, the lender prices the risk into the rate, which is why card interest sits far above mortgage interest.
• Limits and exemptions do not apply themselves. Ignoring a summons produces a default judgment regardless of how strong a defense you had.
• Support orders, tax debts and Chapter 13 orders escape the garnishment cap entirely and can take a much larger share of a paycheck.
• The job protection covers garnishment for one debt only, so a second garnishment removes it.
• Several unsecured debts, including most taxes, support obligations and student loans, survive bankruptcy anyway.