Secured vs unsecured debt -Toronto-Ontario

When you and your credit counsellor discussing whether bankruptcy, is the right solution to your financial problems, you’ll need to know the difference between secured and unsecured debts.

Your repayment of a secured debt is essentially guaranteed by the asset for which you took the loan. A home mortgage is a very common type of secured loan — the loan to pay for the home is secured by the value of the home itself. If you fail to meet the terms of your repayment agreement, the lender can terminate the agreement, and seize and sell the home. For the duration of the mortgage they have a lien on your property that restricts what you can do with it. A car loan is another example. The lender maintains a lien on the vehicle until the debt is repaid.

By contrast, unsecured loans are essentially granted on the strength of your work history and credit score, and “guaranteed” by no more than your signature and good reputation. A credit card is the common example of an unsecured loan. The credit card company has no claim on the items for which you used your credit card to pay. Most

of your bills, including taxes and medical bills, are unsecured debts. You will usually pay a higher interest rate on unsecured debt, because the lender is taking a greater risk than if it were secured debt.

It’s only unsecured debt that is discharged in bankruptcy. If you have secured loans for an asset and wish to keep the asset, you’ll have to continue to make your agreed-upon payments. Secured debts are treated differently in a consumer proposal, too. It can get a little complex, so you should definitely talk over all of your debts with your bankruptcy trustee or credit counsellor.

(And remember that if you charge a significant amount just prior to declaring bankruptcy, your credit card lender will likely consider that fraud, and demand payment, although that still doesn’t make it a secured debt, even if you bought something seizable, like furniture.)

If your debts have become unmanageable, call a qualified credit counsellor today.

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