What is the Difference Between Unsecured, Secured and Preferred Creditors?
Sometimes, bankruptcy can seem like there’s a lot to take in.
We all cope better when we feel like we’re in control of a situation – but often, that’s not the best solution to problems which have gotten out of control.
Anything we can do to improve how we feel about our current circumstances will be a help – and that’s where learning comes in.
One of the least stressful ways to get through bankruptcy is to develop some understanding of the process.
Often, the things that worry us are factors we don’t need to be concerned about at all.
We’ll also find out how each type of debt gets dealt with.
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Creditors get classed as two main types during bankruptcy in Canada.
People and organizations you owe money to are called secured and unsecured creditors.
Within each of these classes, you’ll also find further sub-classes.
First, let’s look at what a secured creditor is – and how they get handled under the Bankruptcy and Insolvency Act.
Secured creditors have a legal agreement in place with you to hold a claim over some of your possessions or property.
A good example of a secured debt is a mortgage on a property.
Basically, borrowers run the risk of losing their house, investment property or home if they default on their mortgage.
In short, secured debts mean a lender has a legal right to seize anything you listed as security with them.
That could be a car or a boat – in the case of a secured loan, or even a domestic appliance – in the case of a rent-to-own agreement.
Your property might also be subject to a lien if you owe money to an individual or organization for repairs or storage.
So, that pretty much gets us to the type of credit you took on back before your bankruptcy – but, what does it mean in your current circumstances?
Well, the primary significance of secured debts with regard to bankruptcy is that they do not get included in proceedings – so, you don’t have the same protections you get from unsecured creditors when you’ve pledged a possession as security against a debt.
In fact, the Bankruptcy and Insolvency Act itself only really applies to unsecured debts.
For that reason, it’s necessary to carefully consider your options when it comes to any secured debts you have.
How to Handle Secured Debt During Bankruptcy
What it boils down to is that your options at the time of bankruptcy will come down to what you want to do and to what you can afford.
Secured creditors will expect you to make payments on credit associated with security even after you file for bankruptcy.
If you don’t, they can still take action to seize your property based on their agreement with you.
However, you still have a choice when it comes to handling such debts.
If the possession you used to secure a loan holds no significant sentimental value for you, and it’s also worth less than what you owe – you may wish to let the creditor repossess the item.
When that happens, any shortfall between the value of your property and the amount outstanding on your loan will become an unsecured claim in your bankruptcy.
If you decide to let the item go, but its value exceeds the amount of your debt, then the difference will become part of your bankruptcy fund and get distributed among your creditors.
Not all secured credit or mortgage debts are subject to this rule, however.
In some places under certain circumstances, you get to keep your car, home, and other possessions during bankruptcy.
Unsecured creditors are treated in a different way during bankruptcy.
Those who successfully demonstrate a claim receive a share of any monies realized in the process.
While they can apply for an execution judgement against one of your assets – most times, that will get removed once you get discharged from bankruptcy or at the point when you complete a consumer proposal.
Most of us go through life with several different forms of unsecured credit.
Unsecured debts can be:
- Unsecured bank loans;
- Utility provision is a form of unsecured credit;
- Payday loans;
- Credit card balances;
- Student debt;
- Tax debts in (the absence of a lien against property).
The Types of Unsecured Creditors in Canadian Bankruptcy
Not all unsecured creditors get created equal, however.
During your bankruptcy, your unsecured creditors get ranked according to several different factors and may be entitled to a pro-rated share:
These creditors have a full or partial claim to receive a dividend before other unsecured creditors.
That applies to both bankruptcy and a consumer proposal.
Preferred creditors are usually employees of yours and dependents with family court support agreements.
Deferred creditors are deemed to have no right to receive any monies from your bankruptcy until all other creditors have gotten paid – in full.
Family members you owe money to can be a deferred creditor.
This type of creditor doesn’t fall into any of the previous two groups.
This is probably where most of your unsecured debts will sit during your bankruptcy.
Things like credit card debts, unsecured loans and even income tax debt get classed as ordinary.
Types of Creditor During Bankruptcy and Special Considerations
That covers most of the debts you’re likely to have when you file for bankruptcy in Canada – however, there are some instances where special rules apply:
In the case of tax debts, while they get treated like any other form of unsecured credit – that can change if before you filed, the government registered a lien against your home or property.
That applies with income tax, HST debt, and other tax liabilities you may have.
Student debt generally gets treated as unsecured during bankruptcy – however, it’s important to be aware that special conditions apply.
Before you can get discharged from bankruptcy in Canada with student debt, you’ll need to fulfil the requirements of specific rules.
Co-signers and guarantors can find themselves in a precarious position when you file for bankruptcy.
While once you enter the process, you are no longer responsible for any debts of this type – guarantors will be required to pay.
When you and your co-signer took on the debt, you both agreed to be responsible for it.
Even after your bankruptcy, a lender is within their rights to pursue collection action against a guarantor.
The co-signer is liable until the debt gets paid in full.
That collection activity can include both wage garnishment and lien registrations.
Don’t weigh up your options alone – get the advice you need
Here at BankruptcyCanada, we’ve helped thousands of Canadians over the years to navigate their journey through bankruptcy.
You don’t need to figure everything out on your own.
We have access to a vast network of professionals – including in your area – and the help you need to make the right decisions is just a phone call away.
Speak with one of our friendly team today on (877) 879-4770 (24/7) and find out what your own options are.
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