When creditors lend money or extend credit, they do so with the expectation that the borrower will repay the debt. However, not all debts are treated the same under the law. In South Dakota, creditors are classified as either secured or unsecured, and their rights differ depending on the type of debt owed to them.
Understanding the differences between secured and unsecured creditors can help businesses, lenders, and individuals protect their financial interests and take the appropriate legal steps when collecting a debt. This article explores the key distinctions between secured and unsecured creditors, their rights under South Dakota law, and what options they have when a debtor fails to pay.
A secured creditor is a lender or entity that has a legal claim—also known as a security interest—on a debtor’s property. This means that if the debtor defaults on the loan or fails to make payments, the creditor has the right to seize and sell the property to recover the outstanding debt.
Common examples of secured creditors include:
Since secured creditors have a legal claim to collateral, they typically have a stronger position when collecting debts compared to unsecured creditors.
An unsecured creditor is a lender or entity that provides credit or services without requiring collateral. Because there is no property backing the loan, unsecured creditors have fewer legal options if the debtor fails to repay the debt.
Examples of unsecured creditors include:
Unsecured creditors must rely on legal actions such as lawsuits or debt collection agencies to recover unpaid debts.
Secured creditors have specific legal rights that allow them to enforce their claims against debtors who default. These rights include:
When a borrower fails to make payments on a secured debt, the creditor can take action to seize the collateral. In South Dakota, this applies to assets such as vehicles, equipment, and real estate.
For example:
Creditors must follow South Dakota’s legal procedures for repossession, including providing proper notice and avoiding breach-of-peace situations.
When a debtor fails to make mortgage payments, the lender can initiate foreclosure proceedings to recover the outstanding debt. South Dakota primarily follows judicial foreclosure procedures, meaning that foreclosure cases must go through the court system.
Once foreclosure is approved, the lender can sell the property at auction to satisfy the debt.
Businesses that extend credit for equipment, machinery, or inventory can file a UCC-1 Financing Statement with the South Dakota Secretary of State. This document formally establishes the creditor’s legal claim to the property, ensuring they have priority over other creditors if the debtor defaults.
If the sale of collateral does not cover the full amount owed, secured creditors can seek a deficiency judgment to recover the remaining balance. This allows them to collect the unpaid debt through wage garnishments, bank levies, or other legal means.
Unsecured creditors have fewer automatic protections than secured creditors, but they still have legal avenues to collect unpaid debts. Their rights include:
When a debtor fails to pay an unsecured debt, the creditor can file a lawsuit in a South Dakota court. If the creditor wins the case, the court may issue a judgment requiring the debtor to pay the outstanding balance.
If an unsecured creditor successfully obtains a court judgment, they may place a judgment lien on the debtor’s real property. This prevents the debtor from selling or refinancing the property until the debt is paid.
After obtaining a judgment, an unsecured creditor can request a court order to garnish the debtor’s wages. In South Dakota, creditors can garnish up to 20% of the debtor’s disposable earnings, subject to exemptions for basic living expenses.
Judgment creditors can also seek a bank levy, which allows them to freeze and collect funds from the debtor’s bank account. However, state and federal laws protect certain types of income, such as Social Security benefits.
When a debtor files for bankruptcy in South Dakota, the type of creditor plays a major role in how the debt is handled.
Secured creditors generally retain the right to recover their collateral unless the debtor reaffirms the debt or pays it off through a bankruptcy repayment plan. If the debtor does not keep up with payments, the secured creditor may still repossess or foreclose on the property.
Unsecured creditors often have little recourse in bankruptcy. In Chapter 7 bankruptcy, many unsecured debts are discharged, meaning the debtor is no longer legally obligated to pay. In Chapter 13 bankruptcy, the debtor may be required to pay a portion of their unsecured debts through a court-approved repayment plan.
Whether a creditor is secured or unsecured, understanding legal rights is crucial for protecting financial interests. Secured creditors have stronger protections through collateral, while unsecured creditors must rely on legal actions like lawsuits and garnishments.
For creditors seeking to enforce their rights or recover outstanding debts in South Dakota, contact us today. At Ogborn Mihm Quaintance, we assist businesses and lenders with debt collection strategies, contract enforcement, and creditor representation in court.
