What is the difference between secured and unsecured debt?

by Jason Quinney on September 19, 2013

When I meet with people here in Orillia one of the main questions people want to know is; what is the difference between secured and unsecured debt? So, here is a quick explanation of what the difference is.

Basically there are two different types of debts that are important when you file bankruptcy or a consumer proposal. These are called secured debts and unsecured debts.

Secured Debts

A secured debt is a debt that is secured by some sort of collateral or charge. Two examples of secured debts are a mortgage or a car loan.

When you buy a house, you need to get a mortgage loan to finance the purchase of your house, the loan is then secured by a mortgage on the house itself. A car loan works in the same way, you get a car loan to purchase a car and the loan is then secured by the car.

If you fail to pay for the mortgage or the car loan, the finance company has the right to seize their security (the house or car) and sell it to recover their money. If the creditor sells the security for more than the debtor owes, than the creditor must give the excess funds to the debtor. Or if the creditor is still owed money after the security is sold then the debtor owes the difference.

If you file bankruptcy, secured debts are not automatically released. If you want to keep your car or your house you can simply continue with the loan payments. In a consumer proposal you have the same option.

Unsecured Debts

An unsecured debt is a debt that is not backed by any collateral. Examples of unsecured debts are credit card debts, utility bills, taxes, and pay day loans.

Because the debts are not backed by any collateral, these types of debts could present a higher risk for lenders as they might have to sue to recover their money if the debtor doesn’t pay.

Unsecured debts can be wiped out when you file a bankruptcy or a consumer proposal.

What is your next step?

If you are thinking of filing for bankruptcy or a consumer proposal it is important to know what the difference between secured and unsecured debt is, as they are both treated differently.

If you want more information on secured or unsecured debts and how they affect your debt problems, send me an email or give me a call @ 310-PLAN and I will be happy to discuss what your different options are in dealing with your debt.


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