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Secured vs Unsecured Debt – What is the difference?

June 21, 2016

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There are two major types of debts: secured and unsecured. Knowing the difference between the two types of debt will help you make a decision on how to best deal with financial difficulties, and which option may work best for you.

Secured vs Unsecured Debt

Secured debt

Secured debt is where the financial institution takes collateral as security for loaning the money. For example, when you finance the purchase of a car a lien is placed against the vehicle, which gives the creditor the right to seize the asset should you fail to make your payments. This would be the same where the bank has a mortgage against your home.

Unsecured debt

Unsecured debt is where there is no asset given as collateral. This would include debts such as credit cards, lines of credit, telephone and utility bills, and payday loans.

A Licensed Insolvency Trustee will consider the equity in a secured asset while assessing your options. In doing so, the market value of your home or car is determined and the mortgage or loan is deducted from this value. If there is a balance remaining, this is called equity. Your creditors may have an interest in this amount. In British Columbia, you are allowed to keep the first $12,000 of equity in a home you solely own in the Capital and Greater Vancouver Regional Districts, and $9,000 elsewhere in British Columbia. In addition, you may keep the first $5,000 of equity in your vehicle. The Trustee will need to consider the equity, if any, that exists after your exemptions are deducted.

If you do have equity in your home or vehicle over and above the given exemptions, there are different ways the Trustee can deal with these assets in a bankruptcy. Alternatively, a different financial solution may be appropriate, such as a consumer proposal.

In a bankruptcy, if the home is solely owned and the equity is a small amount, you may be able to repurchase the asset from your bankruptcy estate. For example:

Value of Home $500,000
Less: Mortgage $478,000
Less: Exemption $12,000
Net Equity: $10,000

A person could keep their home in a bankruptcy if they agree to pay $10,000 to the Trustee for the benefit of their unsecured creditors over an agreed-upon period of time. The remaining unsecured debt would be extinguished upon receiving your discharge from bankruptcy.

When considering a consumer proposal in this same situation, a Licensed Insolvency Trustee needs to consider the fact that the creditors would be entitled to $10,000 in a hypothetical bankruptcy when determining what a suitable offer would be to make to your unsecured creditors. In most cases, the Trustee is able to settle with your creditors for approximately 30 to 40 cents on the dollar.

In this scenario, filing either a bankruptcy or consumer proposal would result in the debtor keeping their home if they desire.

A Licensed Insolvency Trustee is legally obligated to provide you with unbiased advice and inform you of all of the financial options available. A Licensed Insolvency Trustee can discuss how a bankruptcy may affect your assets, and to talk about other options that may be available to you.

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