What’s the Difference Between Secured Debt & Unsecured Debt?
Professionals working in the bankruptcy industry know there is a lot of jargon in the business. It’s easy to get caught up in all the different terms that they use in their business, forgetting that they are not common terms or concepts for the rest of society. One of the most common distinctions they make everyday is to determine if debt is ‘secured’ or ‘unsecured’. But when you ask someone about that outside of the industry, a typical response is – “What’s that?”
What happens to my house in a Bankruptcy or Consumer Proposal?
Secured debt is when the person or company you owe money to has the right to take your property if you default on your payments. One of the most typical forms of secured debt is a car loan. If you do not make your car payments, the company that financed your vehicle loan will usually come and seize your car. They would then sell it for whatever they can get, and use the proceeds to pay your loan agreement. What usually happens is they do not sell it for enough money to cover the entire agreement, and you end up having to pay the rest. This is referred to as a shortfall.
It is important to note that in order for a debt to be secured, you would have had to ‘pledge’ your security. That means that your loan agreement would spell out exactly what property the creditor would be able to take should you default. The laws about what type of property you are able to pledge as security vary from province to province. The creditors can’t just take your property when you don’t pay as their right to do so is limited by legislation and the terms of your loan agreement.
What is unsecured debt then? Well, basically it’s a blanket term for all other types of debts, where no assets have been pledged to the creditor. Credit cards, lines of credit and bank loans are the most common types of unsecured debt, but even old service contracts, unpaid rent, money owed to family and friends are all types of unsecured debt.
The reason why it is important for bankruptcy professionals to determine what type of debt you have is that it may make a difference whether bankruptcy is an option for you. For example, if you have a creditor that holds your car as security, and you want to keep your car, then you would need to continue to pay that creditor. If they are the greater majority of your debt, than bankruptcy may not be an option for you unless you change your mind about giving up your vehicle.
If you are unsure whether your debt is ‘secured’ or ‘unsecured’ your Trustee has the ability to assist you by completing lien searches and is skilled at reading loan agreements. They can give you advice for dealing with your debt, regardless of what kind of debt you are carrying.
