How is Secured Debt Treated During Bankruptcy?
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Not all debts are created equal. Some debt is secured while others are unsecured. This matters when it comes to bankruptcy, as each will be treated in their own unique way under the Bankruptcy Insolvency Act (BIA). Bankruptcy provides consumers who are struggling with their debt the chance to start over again. However, while bankruptcy can eliminate most debts, not all debt is dealt with the same way.
In fact, some debt is not handled at all with bankruptcy. That’s why it’s so important to distinguish between the types of debt a consumer has before filing for bankruptcy. And one of the more significant distinctions that need to be made is whether or not the debt in question is secured or unsecured.
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Secured Vs. Unsecured Debt
Secured debts have some form of collateral to back them up. An asset of value will be put up as collateral and can be taken back or repossessed by a lender if the borrower is unable to repay their loan. Common secured debt includes mortgages and auto loans in which the collateral being used is a home or a car, respectively.
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On the other hand, unsecured debt does not involve collateral. There is nothing of value that a lender can take back to recoup their losses if the borrower defaults on their loan. As such, unsecured loans are typically considered riskier and tend to come with higher interest rates as a result. Common unsecured debt includes credit cards, consolidation loans, and lines of credit.
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How is Secured Debt Handled in Bankruptcy?
Most Canadians who file for bankruptcy have some form of a secured loan, which allows lenders to repossess their associated assets if the borrower defaults on their loan payments. However, secured loans are not typically included in bankruptcy. Typically, assets that come with secured debt can be kept by the borrower, as long as the loan payments continue to be made according to the credit agreement.
This means that even if you file for bankruptcy, you can still keep your house or your car, as long as you continue to make your payments on time. A secured creditor is not allowed to terminate your home loan or an auto loan simply because you filed for bankruptcy.
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Of course, if you are unable to keep up with debt payments, your creditor may take possession of the asset. That means your mortgage lender can repossess your home and foreclose on it if you aren’t paying your mortgage. By the same token, your auto lender can take your car back if you’re not making your loan payments. This would be the case whether or not you file for bankruptcy.
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What if Payments on Secured Debt Are Not Being Made?
If you’ve fallen behind on your payments for your secured debt, things can get a little sticky if you decide to file for bankruptcy. If a big chunk of your income is going toward your mortgage payments or secured auto loan payments, you may want to consider voluntarily giving up your secured asset.
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By doing so before you file for bankruptcy, any debt that remains becomes unsecured debt, since the actual collateral has been given back. As such, it can be included in your bankruptcy.
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On the other hand, if you choose to retain your home, car, or other asset and default on your loan payments, any loan amount outstanding after the asset has been sold by the creditor will become a new debt and won’t be included in the bankruptcy proceedings.
Bankruptcy can be a tricky scenario when it comes to the different types of debts that can and cannot be included. You would be well advised to seek the expertise and guidance of a licensed insolvency trustee who will be able to walk you through the bankruptcy process to see if it’s the appropriate avenue you should take, or if there are other options that would be better suited for you.
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