The Difference Between Secured and Unsecured Debt

We often talk to consumers about secured and unsecured debts and how each is treated in a bankruptcy or consumer proposal situation. We often forget that not all consumers are familiar with credit terms so here is a brief explanation of each.

Examples of secured debts include mortgages, vehicle or investment loans.   The borrower gives the lender a lien or mortgage against assets such as property, vehicles or investments in exchange for the loan.  This allows the lender to take back the asset should the borrower default on the loan or mortgage payments.   Lenders also use co-signers to secure loans.  If you default on payment the lender will require your co-signer to take over payments or pay the loan in full.

When an individual files for bankruptcy or a consumer proposal, secured loans are not always impacted and the assets can usually be kept as long as the loan payments are current and continue to be made in accordance with the credit agreement.  However, if the bankrupt or consumer debtor does not wish to keep the asset they can choose to walk away from the debt and allow the secured creditor to take possession of the asset.  If there is a balance remaining after the lender sells the debt it will be included as an unsecured debt in the bankruptcy or consumer proposal proceedings.

Unsecured debts typically include personal loans, lines of credit, credit cards, overdraft on bank accounts, and personal income taxes. The creditor lends you money based on your credit score and other lending criteria and you promise to repay the debt.   Whether you file for bankruptcy or make a consumer proposal, unsecured creditors must all be included and can share in any bankruptcy dividends or proposal proceeds.

Powell Associates Ltd. is a Licensed Insolvency Trustee (LIT) focused on providing debt settlement, proposal and bankruptcy solutions for individuals and businesses.  We offer free consultations to review your personal financial situation and practical debt resolution options.  Contact us to discuss your situation over the phone or book an appointment to meet us face-to-face in Saint John, Moncton, FrederictonCharlottetown or Dartmouth - it's your choice.