Secured Debts In Bankruptcy: How Does It All Work
Most unsecured debts are discharged when filing bankruptcy in Canada.
However, secured debts are handled a little differently.
Secured debts have been secured against an asset, such as a house or car, and they can make things a little more complicated if you are thinking about filing for bankruptcy.
However, many people who are filing bankruptcy have a secured debt of some kind, such as a mortgage.
It’s useful to know how secured debts are handled and how your assets might be affected if you file bankruptcy or if you choose the alternative of a consumer proposal.
Definition of Secured Debts
Secured debts are debts that involve collateral.
The debt is secured against an asset with value, which can be reclaimed or sold by the lender if you do not keep up with your payments.
Two common types of secured debts are mortgages and auto loans.
When you file for bankruptcy or a consumer proposal, these types of debts are usually not affected.
The most important thing is that you stay up to date with your payments.
If you fall behind, there could be problems with your secured debts.
What Happens If You Don’t Keep Up with Payments?
Keeping up with your payments for secured debts is important if you’re in a position where you are considering bankruptcy.
If your payments aren’t up to date, things can start to get a little more difficult.
Before you decide whether to file bankruptcy, you should look at home much of your income is required to make your monthly payments for secured debts.
If it’s a large amount, your best choice might be to surrender the asset that the debt is secured against.
By doing this, you pay off most or all of your remaining debt.
If there is any debt remaining, it becomes an unsecured debt, and this can be discharged when you file bankruptcy.
However, if you decide to keep the asset and file bankruptcy, you could later find yourself in trouble.
Defaulting on your payments means that the amount left of your loan after the item has been sold becomes a new debt.
It won’t be included in your current bankruptcy because it didn’t technically exist when you filed bankruptcy.
The better choice may be to voluntarily surrender the asset that your debt is secured against, rather than have it taken from you against your will.
If you have co-signed a debt, this can present an additional problem that you might need to navigate.
When you have a debt that has been co-signed by someone else, which may or may not be secured by an asset, filing bankruptcy can affect the person who co-signed the debt.
Filing bankruptcy means that your creditor can no longer pursue you for the debt, but they are still legally allowed to go after anyone who has co-signed the loan.
This is something to consider before filing bankruptcy.
Contact Bankruptcy Canada to find out more about bankruptcy and how different debts are handled.