When dealing with debt, there are two major types that a debtor could have: secured and unsecured. Banks, debt advisors, and Licensed Insolvency Trustees all treat secured and unsecured debts differently. Understanding the difference between the two is important for borrowing money, for prioritizing paying off your debts, and for making sure you don’t lose any assets that may be connected to your debts.
Secured debts are tied to an asset, like a house or a car. The asset is typically considered collateral for the debt – lenders place a lien on the asset, which gives them the right to take back the asset if you fail to keep up with your payments. If the lender has to take your asset because you can’t pay it off, the asset will oftentimes then be sold. If the selling price doesn’t completely cover the debt, then the lender may pursue you for the difference between the selling price and your outstanding balance on the secured debt.
To put this into context, lets use an example. One of the most common examples of a secured debt is a mortgage on your house. When you’re borrowing money to buy a house, the bank has a collateral or security interest in the property. This means that you give the bank an interest in the property in exchange to borrow the money needed to buy the property. However, if you fall behind on your payments, the bank has the right to seize and sell your property in order to get their money back.
Another common example of a secured debt would be a loan you take out to buy a car. The bank would generally register a lien on the vehicle until the loan is paid in full. With a secured loan, if you don’t keep the loan payments up to date, the bank can seize the vehicle. It also means that you can’t sell the vehicle until they are paid in full as you wouldn’t be able to transfer the ownership.
If you are having trouble making your payments on a secured loan or mortgage, your options are fairly limited if you still want to keep the asset. Because the banks have the right to seize and sell your property, there’s no way for you to discharge the debt in a bankruptcy or consumer proposal filing.
For help with this kind of debt, a budget counselor may be the best help. They will be able to look at your income and expenses and help come up with a plan for you to continue making payments on your secured debt.
Unsecured debt refers to regular consumer debt not related to an asset – the most common being credit card debt. Other kinds of unsecured debt could include student loans, bills for services you use, and court-ordered child support.
The main difference between unsecured debt and secured debt is that there aren’t liens being registered on the purchases you are making. If you do not pay back the money you owe on your credit card for example, the credit card company doesn’t have the right to seize your purchases to recover their money.
While they can’t take back your assets as repayment, they may take other actions to get you to pay what you owe. They may hire debt collectors or take legal action and get a judgement on you, which may end up in your wages being garnished, and that as you can imagine would be quite troublesome. Running away from unsecured debt isn’t the answer, as it’ll come around and find you one way or another. If you’re having trouble with unsecured debt, you may need the help of a Licensed Insolvency Trustee. By filing for a consumer proposal or bankruptcy, your obligation to pay these debts can be fully eliminated, so don’t wait any longer!
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