Secured Debts in Bankruptcy in Canada
Key Questions to Consider About Secured Debts Before you Consider Bankruptcy
Secured debt is a debt that is secured by a loan on an asset. Secured debt includes a mortgage on your home or a car loan on your vehicle. Secured debts are not discharged in bankruptcy.
Secured debts in bankruptcy can be complicated, however, and there are certain questions you should consider before deciding if bankruptcy is right for you.
Questions to consider about secured debts in bankruptcy include:
How much equity is available in the asset?
Equity is the amount of money available in your asset over your total obligation – such as the loan balance, property taxes, utility bills and other fees and expenses related to selling the asset. If the asset is worth less than the loan then you have negative equity. This negative equity can be eliminated in bankruptcy although you will have to surrender your asset.
Are your payments up to date?
If your payments are up to date on your loan, your asset can still be seized by the secured creditor. If your payments are not up to date the mortgagor can seize your asset whether you file bankruptcy or not.
However, if you would like to keep the asset and can continue making the payments, your secured creditor will often allow you to keep the asset, as it is more profitable for you to keep paying the loan if you can afford to do so. Filing for bankruptcy can free up funds that would go towards paying unsecured debts, that can be used to pay your secured debt loans. This can allow you to keep your home and/or car if you wish to do so.
If you own a home and you are behind on municipal taxes or utility paymens the utility company or city can place a lien on your house and change the debt from unsecured to secured debt.
Do you want to keep your asset?
Keeping your asset that is used as security for a secured debt loan can be tricky. If you have negative equity you can include the debt in your bankruptcy, although you will have to surrender the asset. If you can pay the value of the negative equity and would like to keep the asset you may do so, although this is not advised.
If you have no equity in the asset you can keep the asset as long as you can maintain the payments. Usually maintaining payments on a secured debt is possible after bankruptcy as you will have more funds free because you will no longer be paying on your unsecured debts, such as credit card bills.
If you have positive equity in your secured asset that is over the amount of the bankruptcy exemption in your province, the excess becomes an asset that must be surrendered in your bankruptcy. However, if you can pay your Trustee the value of your excess equity you can still keep your asset if you can maintain the payments on time.
Discussing Secured Debts in Bankruptcy With a Licensed Insolvency Trustee
If you are considering bankruptcy and would like to see how it would impact your assets, you can speak with a friendly trustee in your area. Calculating equity and determining how secured assets would be handled by a bankruptcy can be confusing, so it is always best to discuss with a licensed insolvency trustee, who has experience in these matters.
Additionally, you might want to consider a consumer proposal if you have assets that would be impacted by a bankruptcy filing. Secured debt and assets are not impacted by a consumer proposal filing.
To learn more today please consult your local Licensed Insolvency Trustee.