Unsecured and Secured Debt – Explained
Understanding the differences between unsecured and secured debt is required when dealing with Bankruptcy and Division I/Consumer Proposals.
Unsecured Debt
A specific sum of money owed to a creditor for which no security rights against the debtor’s assets were given.
Secured Debt
A specific sum of money owed to a creditor for which security rights against the debtor’s assets were given.
What types of debt are Secured Debts?
Secured debts are usually loans where the person taking out a loan (the debtor) promises the lender that certain assets can be seized by the lender if the debtor does not honour the terms of the loan.
Mortgages
Mortgages are secure debts. If you take out a mortgage on a house from a bank and you do not honour the terms of the mortgage (ie make all the payments on time) then the bank has the right to seize the house and sell it in an effort to recover the money owing on the loan. Note: there are laws that cover the extent of a secure loan holder’s rights – and how they can be used.
Car Loans
Most car loans are secure debts. If you take out a secured car loan and you fail to honour the terms of the loan (ie make all the payments on time) the lender has the right to seize the car and sell it in an effort to recover the money owing on the loan.
Loans
Other loans can be secured loans if, as a condition of the loan, you promise the lender that something that belongs to you, can be seized by the lender if you do not honour the terms of the loan.
What types of debt are Unsecured Debts?
Unsecured debts are debts where the creditors (ie Toronto Hydro, credit card companies etc) have no rights over specific assets of the person who owes the debt.
Credit Card Debt
Credit card debt is unsecured debt. No specific assets are promised to the lender if you fail to honour the terms of the credit card agreement.
Personal Bank Loans
Personal bank loans are usually unsecured debt. None of your assets are promised to the bank if you fail to honour the terms of the loan agreement.
Monthly Bills
Most of your monthly bills are unsecured debts – ie Toronto Hydro, cable, phone etc.
Note: Income tax debts are unique and must be discussed with your Trustee.
