Unsecured and Secured Debts in Bankruptcy
How Does Bankruptcy Impact Unsecured and Secured Debts?
When an individual or business is going through the bankruptcy process, it’s important to note that their bank, debt advisor and licenced insolvency trustee will treat their secured and unsecured debts differently.
Remember, a bankruptcy discharge eliminates debts, however, this doesn’t mean it eliminates liens.
When it comes to Canadian bankruptcy laws, you may obtain a discharge for some of your unsecured debts, but a bankruptcy does not discharge secured debts. Your obligation to pay the debt can be eliminated, but a lien will still exist – the creditor may still be able to recover the collateral.
To understand this better, we’ve provided some information for you below.
Secured debt is debt to which you’ve pledged one or more assets as collateral.
The most common example of secured debt is a mortgage, where you’ve borrowed money from a lender (such as a bank), to buy a house.
Under this scenario, the bank uses the property as collateral for the loan they’ve issued to you and, should you sell the property, you must use the proceeds from the sale to pay the bank back first.
This secured debt, like nearly all secured debt, involves a security interest, whereby you need to make monthly interest payments to the lender.
The interest rate on a secured loan depends on the type of security and prevailing interest rates at the time, however, is typically lower than an unsecured loan.
As the name suggests, unsecured debt is debt that isn’t related to any assets.
Examples of unsecured debt includes credit cards, consolidation loans and personal loans.
Because there is no asset securing the debt, the lender doesn’t have any right to seize your assets if you default on your debt obligations.
Such debt is inherently riskier than secured debt, as such, it carries a higher interest rate.
Depending on the type of debt, the interest rate could vary anywhere between 3%-45%.
What debt survives a bankruptcy?
In the context of bankruptcy, only secured debts survive, because bankruptcy only allows the discharge of unsecured debts.
However, there are some unsecured debts that will survive a bankruptcy.
- Child support payments;
- Court orders;
- Debts which have resulted from fraudulent activity;
- Spousal support and alimony payments and;
- Student loans which are less than 7 years old.
Government overpayments also make this list. For example, you may have been paid too much in Employment Insurance benefits.
So, What Debts Are Discharged in Bankruptcy?
- Credit card debt;
- Unsecured personal loans;
- Payday loans;
- Medical bills and;
- Income tax, HST and property taxes.
Creditors, your bankruptcy trustee, or the Office of the Superintendent of Bankruptcy can oppose your discharge, noting that they must adhere to certain rules.
If this situation does arise, your trustee will explain the process.