partially secured debt

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A partially secured debt is a form of secured debt in which debt is backed by collateral with a value lesser than that of the full debt owed. Also known as undersecured debt. Such a debt can be illustrated, for example, with a home valued at $750,000 used to secure a $1,000,000 mortgage on that home. It is generally not in the best interest of a business to seek unsecured or partially secured debt, as this can hinder efforts to reorganize via filing for Chapter 11 bankruptcy.

An unsecured creditor’s claim on debt can be split into the following: a secured claim for the value of the debtor’s collateral, and an unsecured claim for the difference between the secured claim and the total debt. A debtor is able to pay down the unsecured portion of a partially secured debt only with property that does not have a lien placed upon it.  

Additionally, if the sum of an individual’s interest-bearing balance of debt exceeds a security interest’s maximum limit or share of a residence, any excess debt is not treated as secured debt. The total debt in such a scenario is effectively partially secured.

[Last updated in August of 2020 by the Wex Definitions Team]