What is the Difference Between a Secured and an Unsecured Debt

There is often confusion between a secured and an unsecured debt. Creditors take for granted that everyone knows the difference.  However, that is not always the case. the distinction is important because only unsecured debts are included in a consumer proposal.

Secured Debt

Secured debt is a debt that you have pledged an asset to guarantee the payment of the debt. The most common examples are mortgages on real estate and car loans. With real estate, the mortgage is registered on title and as long as the real estate is worth more than the mortgage, the mortgage will be paid in full either through regular payments or when the real estate is sold. The real estate guarantees the payment of the loan. With a car, the security is registered with the province and stays with the car until the loan is paid.

There are other debts that are secured also. Often a bank will ask for someone to co-sign a debt. If you default or file for bankruptcy or a consumer proposal, the bank will seek payment from the person or persons who co-signed the debt. Another possibility is a secured credit card. In this case, the card holder pays the issuer and amount of money in order to use the credit card. How much you can spend will be determined by how much is on deposit. If it is fully secured it will operate like a debit card, you can only spend what is on deposit. If it is partially secured, you will be able to use two or three times the amount on deposit depending on the terms you agreed to. Like the mortgage and car loan, the lender is protected to the value of the security held.

Unsecured Debt

Unsecured debt is credit that was given to you based solely on your signature. These are debts like credit cards, income taxes, lines of credit not registered against an asset, phone contracts and generally overdrafts at the bank.  These are normally granted based on your credit rating but sometimes are given without checking. Creditors who do not check the credit bureau include payday loans.  The big exception is income tax as the government has absolutely no control over who has taxes deducted and who does not. Anyone is free to be self employed and the government finds out that taxes were not paid the year after when the tax return is filed.

The only way a secured debt becomes an unsecured debt is if the security is redeemed and there is still a debt left over. Until the security is redeemed, the expectation is the debt will be paid in full.

If you are having problems with your unsecured debt, a consumer proposal or a bankruptcy may be the solution to your problem. And if you are having a problem with secured debt, you may need to turn the security over to your lender and seek a solution for your unsecured debt.

For professional advice specific to your situation, contact a consumer proposal administrator near you.

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