What happens if a borrower defaults on an unsecured loan?

UPDATED: Aug 27, 2011

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What happens if a borrower defaults on an unsecured loan?

I am a realtor and have a short sale. The seller owes around 170k on first and same on second. We have offer of about 224k so we can pay off first but second will be short. Second agrees to release lien with an unsecured personal loan from seller with no interest. What if seller defaults on that loan later? If its not secured, what can assets can they go after?

Asked on August 27, 2011 Michigan


M.T.G., Member, New York Bar / FreeAdvice Contributing Attorney

Answered 11 years ago | Contributor

The unsecured creditor has to then sue the debtor and obtain a judgement and then the creditor can collect on the judgment in the same way as any creditor is permitted to in your state: wage garnishment, levy on bank account, levy on personal property, etc.  The debtor will then have the option of filing bankruptcy and discharging the debt.  The creditor or second mortgage holder may be better off discharging the debt and writing it off on their bottom line or maybe you can make a deal with the first and second to each take less and discharge for the seller. Someone needs to explain all this to the seller though.  You should make sure that their attorney does so.  Good luck.

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