Unsecured Debt & Secured Debt – What is the Difference?
This article will explore Unsecured Debt & Secured Debt – What is the Difference? Debt that a Canadian consumer can take on falls into two different categories – secured debt and unsecured debt.
Whether your debt is secured or unsecured will have a major impact on whether you can file a consumer proposal or file personal bankruptcy, and which of these two debt relief options will be the best choice for you.
When you go bankrupt or file a consumer proposal with your creditors, only your unsecured debt will be eliminated and you will only receive protection from your unsecured creditors. You must continue paying on your secured debt as agreed, and your secured creditors can still sue you.
Unsecured Debt & Secured Debt – What is the Difference
What is Secured Debt?
Secured debt is a debt where the creditor has an interest in the asset that they can go after in the event you are unable to pay your secured debt as agreed.
Common examples of secured debt are a mortgage and a lien on your car when you purchase or lease that vehicle.
When you do not make your mortgage payments as agreed, your creditor can force the sale of your home.
With your car loan, your lender can seize the vehicle if you do not make your payments as agreed.
Property taxes are also a secured debt, as your city can have a lien on your property if taxes on your property are unpaid. Property taxes are a necessity that the municipality depends on to make its’ budget.
What is Unsecured Debt?
A debt that is unsecured is any debt where the creditor has no special collateral in the debt. Any debt that is not secured by an asset is an unsecured debt.
Examples of unsecured debt include credit card debt, lines of credit and personal loans.
Larger dollar amount lines of credit and personal loans might be a secured debt.
Monies owed for utilities, cable, and internet are unsecured debt.
Government debt such as income tax debt and student loan debt is considered unsecured debt.
In some cases, a creditor might be able to transform unsecured debt into secured debt.
If you own real property (house, condominium, cottage, townhouse, rental property, farmland or commercial real estate) your unsecured creditors can sue you for unpaid debt.
If the creditor is successful in suing you, then they can place a lien against your real property, which will effectively make them a secured creditor.
When you are facing financial problems, it might be a wise decision to sell your real property. There are two main advantages to doing this.
The first advantage is that the proceeds from the sale of your real property can generate funds that you can use to pay off your high interest debt.
The second advantage is that you can make it more difficult for your creditors to sue you to recover monies from you.
A secured creditor has a much greater chance of recovering their monies than an unsecured creditor.
Recovering Monies for Secured and Unsecured Creditors
Generally, secured creditors are able to recover at least most of the monies owed to them, while unsecured creditors have a much harder time recovering monies owed to them.
The reason why interest rates are so high on credit cards and other such unsecured debt, is the fact that unsecured debt is hard to recover when the account goes into default.
Between 1 and 3% of credit card customers will default on their credit card debt.
A secured creditor can seize their security interest when an account goes into default. For example, if you have a mortgage that you stop paying on, the mortgage holder can place a lien on your property. The mortgage holder can wait for you to refinance your property, or will sell the house and recover their monies.
In contrast, there are many debt relief options that an unsecured creditor can take that will allow them to repay none, or very little of the monies that they owe to their unsecured creditors. An unsecured consumer can file bankruptcy, which allows them to eliminate all of their unsecured debt, and if they have no assets they would lose, their unsecured creditors will recover very little of the monies owed to them.
A consumer can also file a consumer proposal, which means the creditors might only recover 30-40% of the monies owed to them, without any interest being charged.
Additionally, an unsecured creditor can take advantage of the limitation period expiring to avoid paying any of their unsecured debt.
Limitation Periods For Unsecured Consumer Debt
Unsecured debt will fall into two different categories of unsecured debt – consumer debt or non-consumer debt. Your non-consumer debt is your unsecured debt that you owe to the government and for child support and spousal support requirements.
Your unsecured consumer debt is any other unsecured debt that is not owed to the government or court awarded child and spousal support or court-ordered fines.
The governments of the provinces and territories have enacted limitation period laws, after which they discourage unsecured consumer creditors from suing creditors to collect monies owed to them after a certain period of time. The period of time is known as the limitation period, and if it expires then your creditors will have a very hard time collecting from you.
B.C. – 2 year limitation period – Gives rise to affirmative defence
Alberta – 2 year limitation period – Gives rise to affirmative defence
Saskatchewan – 2 year limitation period – Gives rise to affirmative defence
Manitoba – 6 year limitation period – Gives rise to affirmative defence
Ontario – 2 year limitation period – Gives rise to affirmative defence
Quebec – 3 year limitation period – Gives rise to affirmative defence
New Brunswick – 2 year limitation period – Gives rise to affirmative defence
Nova Scotia – 6 year limitation period – Gives rise to affirmative defence
Newfoundland – 6 year limitation period – Debt Extinguished
PEI – 6 year limitation period – Gives rise to affirmative defence
NWT – 6 year limitation period – Gives rise to affirmative defence
Nunavut – 6 year limitation period – Gives rise to affirmative defence
Yukon – 6 year limitation period – Gives rise to affirmative defence
Limitation Periods Only Apply to Unsecured Consumer Debt
Your secured debts are not affected by the limitation periods; only unsecured consumer debts are impacted by the expiration of the limited period.
Your non-consumer unsecured debt, such as income tax debt and student loans, is also not impacted by the limitation periods in your province.
Child support and spousal support payments are not impacted by the expiry of limitation periods either.
Limitation Period Clock Starts When the Debt Arises
The limitation period acts like a clock, and the clock towards the limitation period expiring starts when you default on your debt. The clock on the limitation period starts on the date of your last payment, or in some circumstances 30 days from the date of your last debt payment.
If you never make any payments at all on an unsecured debt, the clock on the limitation period starts from the date your creditor would have had the right to sue you for collection on the debt.
Can the Clock on a Debt Limitation Period be Re-Started?
If a Canadian consumer with unsecured debt does one of two things then the clock on the debt limitation period will be restarted.
The first thing a consumer can do to restart the clock is to make a partial payment on their debt before the expiry of the limitation period.
The second action a consumer can take that will start the clock on the limitation period is to acknowledge in writing that the consumer has debt owed to the unsecured creditor. In this case, the date of the clock being restarted will be the date on which you provided written and signed acknowledgement of the debt.
What Happens After the Expiration of the Limitation Period?
If you live in Newfoundland and Labrador and the province’s limitation period has expired then your unsecured consumer debt will be extinguished. The limitation period in Newfoundland is 6 years, so all unsecured consumer debt will be eliminated after you have not made a payment on said debt for a period of at least 6 years.
After the limitation period has expired in Newfoundland your unsecured creditors cannot sue you because your debt no longer exists.
In all other province’s and territories in the country, however, the expiry of the limitation period on unsecured consumer debt only results in the rise of an affirmative defence.
This means that once the limitation period has expired you would have to defend yourself if your creditors sued you for collection on unsecured debt that has passed the expiry of the limitation period.
In order to defend yourself against a lawsuit you would have to go to court and plead the expiry of the limitation period for debt collection in your province / territory.
Your creditor will almost always lose the lawsuit if you defend yourself, although if you do not file a defence to the lawsuit and plead the expiry of the limitation period then the creditor could gain a judgment against you for collection on that debt.
Most unsecured creditors will not sue a consumer for unsecured consumer debt after the expiration of the limitation period.
Impact of the Passage of Time on Outstanding Unsecured Consumer Debt
When you stop making payments on your unsecured debt, your creditor will report this to the credit reporting agency which will appear on your credit report.
A poor credit report can hurt your ability to gain new credit, and you will likely get collection calls and you could be sued.
You must wait at least 6 months from payment on unsecured debt before you can make a debt settlement agreement with your unsecured creditors.
The longer you go without paying on your debt, the greater the chance your creditors will accept a generous debt settlement.
If you wait long enough without paying on your unsecured debt – from 2 to 6 years, depending on your province – the limitation period on your debt will expire, which means you could avoid paying any monies for your unsecured debt to your creditors.
To learn more about how your unsecured and secured debt could impact your debt relief options you can schedule a free consultation with a government Licensed Insolvency Trustee.