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Secured Debts vs. Unsecured Debts:
When you are considering bankruptcy in Canada it is very important that you understand the difference between secured debts and unsecured debts as these kinds of debts are treated differently when you are filing bankruptcy.
Secured Debts vs. Unsecured Debts. What is the Difference?
Secured debts are the debt you have that is “secured” by an asset as collateral. Usually your biggest secured debt will be your mortgage loan, which is considered a secured debt because the debt is protected by the house against which the loan was used to finance the purchase. Another common secured debt is your car loan. Since the creditor has the right to seize the asset if you do not make your required loan payments and sell the asset to recover their investment.
Therefore, your creditors can recover their money without you going bankrupt and thus secured debts cannot be eliminated by filing for bankruptcy. This means that if you are planning to go bankrupt you must continue paying the required payments on your secured debts if you want to keep the asset; if you cannot afford to maintain payments on your secured debts you will be required to surrender your secured assets when going bankrupt.
Secured Debts vs. Unsecured Debts: Unsecured Debts
Unsecured debt, on the other hand, is debt that is not secured by a lien (a lien is a right held by another party that controls what the holder of an asset can do with the asset) on an asset. Unsecured debts have a higher interest rate than secured debts because there is a much greater risk to the lender with an unsecured debt.
Unsecured debts are debts such as credit card balances, utility bills, tax debt you owe, medical bills, payday loans, personal loans and any other debt you have without a lien registered against it.
Credit card debt is an unsecured debt even though you have purchased assets because a lien is not registered against the asset by the credit card company.
You can speak to one of our Bankruptcy Canada Bankruptcy Trustees about your debts if you are confused of whether it is a secured or unsecured debt. Because unsecured and secured debt is treated very differently and will have a possible impact on your bankruptcy cost, and the length of time you will be bankrupt it is vital that you understand which of your debts are which.