Unsecured debt

Key Takeaways

• Unsecured debt has no collateral behind it. The lender's only claim is a personal promise to repay, enforced by suing the borrower.
• Secured debt is tied to a specific asset. A home loan secured by a deed of trust lets the lender reach the house through the trustee rather than through a lawsuit.
• Credit cards, medical bills, and personal lines of credit are the usual unsecured examples. A home equity line of credit is secured, because the home is pledged.
• Washington's homestead exemption under RCW 6.13.030 is the greater of $125,000 or the county median sale price of a single-family home in the preceding calendar year, and RCW 6.13.080 does not list ordinary judgment debts among the exceptions.

What It Means

Unsecured debt is money borrowed on nothing but a promise. No specific asset is pledged, so if the borrower stops paying, the lender cannot simply take something back. It has to sue, win a judgment, and then chase whatever property the law allows it to reach. Secured debt runs the other way: the borrower pledges Collateral, and the lender's rights attach to that asset from the day the loan closes.

The difference shows up in price. A lender with nothing to seize builds the extra risk into the rate, which is why credit card balances and unsecured personal lines of credit almost always cost more than a mortgage to the same borrower. Our explainer on how rates move Washington home sales works through the pricing side. The difference also shows up in speed. A home loan secured by a Deed Of Trust can be enforced against the property through the trustee, while a card issuer has to go to court first.

Real estate students meet the term twice. Once when comparing a home equity line of credit, which is secured by the home, against a personal line of credit, which is not. And once when a client's old unsecured balance has become a Judgment that turns up on the title report.

How It Works in Washington

Washington's homestead law is where unsecured debt runs out of road. RCW 4.56.190 provides that the real estate of any judgment debtor, and such as the judgment debtor may acquire, not exempt by law, shall be held and bound to satisfy a judgment. The phrase not exempt by law does the work. RCW 6.13.070(1) says that, except as provided in RCW 6.13.080, the homestead is exempt from attachment and from execution or forced sale for the debts of the owner up to the amount specified in RCW 6.13.030. RCW 6.13.030 sets that amount as the greater of $125,000 or the county median sale price of a single-family home in the preceding calendar year. RCW 6.13.040 makes the protection automatic from the time the property is occupied as a principal residence by the owner, with no declaration to file.

RCW 6.13.080 then lists the judgments the Homestead Exemption does not stop, and that list reads like an inventory of secured obligations: mechanic's, laborer's, construction, and material supplier's liens against the property claimed as a homestead, debts secured by security agreements describing the homestead as collateral, and debts secured by mortgages or deeds of trust on the premises. It also covers child support, certain state medical assistance recovery, and association liens. An ordinary credit card judgment appears nowhere on it. That is what unsecured means in practical Washington terms: the creditor may hold a judgment, but the homestead equity protected by RCW 6.13.030 is not available to satisfy it.

Example

Ben Ostrom owns a house in Spokane County worth $430,000. He owes $260,000 on a first mortgage secured by a deed of trust, so he holds $170,000 in equity. He also owes $38,000 in credit card balances, which are unsecured. Ben loses his job and stops paying both.

The two creditors are not in the same position. The mortgage lender does not need a court's permission, because it holds a recorded deed of trust and can proceed through the trustee. The card issuer has no lien at all. It must sue Ben, win, and record a judgment before it has any claim touching real estate.

Say the card issuer does win a $38,000 judgment. Ben's homestead exemption under RCW 6.13.030 is the greater of $125,000 or the Spokane County median sale price of a single-family home in the prior calendar year. If that median was $385,000, his exemption is $385,000, which exceeds his entire $170,000 of equity. RCW 6.13.080 does not list an ordinary judgment debt among its exceptions, so the card issuer cannot force a sale of the home to collect. The mortgage lender sits squarely inside the RCW 6.13.080(2)(b) exception for debts secured by mortgages or deeds of trust, and the homestead does not slow it down. Our overview of loan types every Washington broker should know shows where each of these debts sits.

Common Mistakes and Exam Traps

• A home equity line of credit is secured debt, not unsecured. The home is the collateral, which is what separates it from a personal line of credit.
• Unsecured does not mean uncollectable. The creditor can still sue, win a money judgment, garnish wages, and reach property that no exemption protects.
• A judgment lien is an involuntary general lien that reaches the debtor's property broadly, while a mortgage or deed of trust is a voluntary specific lien on one parcel. Exams swap these two constantly.
• Washington's homestead protection is automatic for an owner occupied principal residence under RCW 6.13.040, so an answer requiring the owner to file a declaration first is wrong in that situation.