Unsecured Debt & Secured Debt – Explained
Understanding the differences between ‘unsecured debt’ and ‘secured debt’ is required when dealing with Bankruptcy and Division I/Consumer Proposals.
In our Glossary, we describe unsecured debt as:
A specific sum of money owed to a creditor for which no security rights against the debtor’s assets were given.
In our Glossary, we describe secured debt as:
A specific sum of money owed to a creditor for which security rights against the debtor’s assets were given.
While these are accurate and suitable descriptions for a glossary, many of our clients need fuller explanations. To do that, we will start by explaining what ‘secured debt’ is.
What is Secured Debt?
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.
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.
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.
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.
What is Unsecured 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 are usually unsecured debt. None of your assets are promised to the bank if you fail to honour the terms of the loan agreement.
Most of your monthly bills are unsecured debts – ie Toronto Hydro, cable, phone etc.
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.
Note: Income tax debts are unique and must be discussed with your Trustee.
Further Questions? Let us know.