The Difference Between Secured and Unsecured Debt
We often talk to consumers about secured and unsecured debts and how each is treated in personal bankruptcy or consumer proposal situations. 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. In exchange for the loan, you will give the lender security against certain assets; such as a mortgage on your house or lien on a vehicle. The security against the asset(s) allows the lender to take back the asset should the borrower default on the loan or mortgage payments. Learn more about liens & judgments here.
Lenders also use co-signers to secure loans. If you default on the loan payments, the lender will require the co-signer to take over payments or pay the loan in full.
When you file personal bankruptcy or a consumer proposal, secured loans are generally not impacted. You can usually keep the assets; as long as the loan payments are current and continue to be paid. This means, in plain language, that you likely won’t lose your house if you file bankruptcy.
If you don’t wish to keep the asset, you can choose to walk away from the debt and allow the secured creditor to take possession of the asset. If there is an outstanding balance after the lender sells the asset, it will be included as an unsecured debt in your personal bankruptcy or consumer proposal.
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 or other lending criteria, and you promise to repay the debt. Whether you file personal bankruptcy or a consumer proposal, all unsecured creditors are included and all unsecured creditors can share in any bankruptcy or proposal proceeds.
Not sure which debts can and cannot be included in a consumer proposal or bankruptcy? Check out our article discussing which debts are released by the two options.
Powell Associates Ltd. is a Licensed Insolvency Trustee. We are experienced, hands-on insolvency practitioners who understand the personal impacts of significant financial stress;
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Once you file a consumer proposal or personal bankruptcy, we deal directly with your creditors on your behalf. Your unsecured creditors are required to stop contacting you or continuing legal proceedings against you. Contact us for a free consultation.
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