23/11/2019 0 Comments
The Difference Between Secured Debt and Unsecured Debt
Our debt counsellors are frequently asked by clients in Edmonton to explain the difference between secured debt and unsecured debt.
Given how often the question comes up, we thought it would be helpful to discuss two key issues:
- The difference between secured debt and unsecured debt; and
- Why it is important to distinguish between the two categories of debt.
As always, if you need more information, debt help, or would like to discuss how these concepts apply to your unique financial circumstances, contact the licensed insolvency trustees at Fox-Miles & Associates Inc. today at 780-444-3939 to schedule a free initial consultation.
What is secured debt?
Secured debt is debt that is backed by an asset or collateral. Examples of secured debt include a mortgage registered against a home and a motor vehicle lien registered against a vehicle. If a secured debt is not paid, the secured creditor can go after the asset or collateral to satisfy the outstanding debt owing (the house subject to the mortgage and the motor vehicle subject to the lien in the examples provided). It is also often the case that larger loans or lines of credit are secured as the creditor will require a security interest to balance against the risk of non-payment. Because the creditor can seize the asset or collateral backing the secured debt if the debt is not paid, interest rates on secured debts are typically lower than for unsecured debt.
What is unsecured debt?
Generally speaking, any debt that is not backed by an asset or collateral is considered an unsecured debt. Most consumer debts are unsecured – for example, smaller personal loans or lines of credit; phone, internet, and TV bills; and the majority of credit cards (though there is such a thing as a secured credit card, which is one that requires a security deposit before the financial institution will issue the credit card). Because an unsecured creditor has no specific asset or collateral to seize if the debtor stops making payments, interest rates on unsecured debts are generally much higher to balance out the creditor’s risk of default. It is important to understand that while there is no specific security interest backing unsecured debt, banks and creditors have other options for enforcing unsecured debt if it is not paid. For example, an unsecured creditor can sue the debtor to get a court order to recover the debt owed through income garnishment. An unsecured creditor can also bring a lawsuit against a debtor to obtain a judgment in the amount owed that is then registered as a lien against the debtor’s real property – in other words, it becomes a debt that is in effect secured against the debtor’s house or condo.
Why does the distinction between secured and unsecured debt matter?
If you get into financial difficulty and need to file for personal bankruptcy or submit a consumer proposal, the distinction between the two categories of debt becomes of the utmost importance. This is because personal bankruptcy and consumer proposals only provide protection from unsecured creditors. Put another way, neither personal bankruptcy nor a consumer proposal can provide relief from secured debt.
A personal bankruptcy will eliminate most unsecured debt but there are a few exceptions, such as certain student loans, child support payments, and court fines, that are not relieve by a bankruptcy. A consumer proposal, on the other hand, allows you to pay back a percentage of what you owe on unsecured debts over a period of time with no interest. To better understand how your unsecured debt or secured debt will be managed in a bankruptcy or a consumer proposal, and which of those options might be right for you, talk to one of our bankruptcy trustees in Edmonton by calling 780-444-3939 today to arrange a free initial consultation.
Difficulty Paying Secured or Unsecured Debt? We Provide Debt Help In Edmonton
Trouble paying your secured or unsecured debts is a sign that you may need the services of a licensed insolvency trustee. If you want to learn more about how you can deal with your current debt situation, speak to our licensed insolvency trustees about options including filing for personal bankruptcy or making a consumer proposal. Edmonton-based debt counsellors at Fox-Miles & Associates Inc. provide helpful financial advice and clear, customized strategies to obtain relief from financial distress. Call our offices today at 780-444-3939 to arrange your free consultation with us. We provide debt help and debt counselling in Edmonton and to clients in the surrounding areas including Sherwood Park, Fort Saskatchewan, St. Albert, Spruce Grove, Stony Plain, Leduc, Hinton and Edson.