WHAT IS UNSECURED DEBT?
Generally speaking, any debt that is not backed by an asset or collateral is considered unsecured debt. Most consumer debts are unsecured. Some examples of unsecured debts are small personal loans or lines of credit, phone bills, internet, utility bills, and most credit cards. 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 essential to understand that while there is no specific security interest backing unsecured debt, banks and creditors have other options for enforcing unsecured debt if its payment is lacking. 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 which the creditors can register 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?
Suppose you get into financial difficulty and need to file for personal bankruptcy or submit a consumer proposal. In that case, the distinction between the two categories of debt becomes of the utmost importance. The distinction is because personal bankruptcy and consumer proposals only protect from unsecured creditors. Put another way, neither personal bankruptcy nor a consumer proposal can provide relief from secured debt.
Personal bankruptcy will eliminate most unsecured debt, but there are a few exceptions, such as individual student loans, child support payments, and court fines, that are not relieved by a bankruptcy. On the other hand, a consumer proposal allows you to pay back a percentage of what you owe on unsecured debts over some time with no interest. To better understand how the courts manage your unsecured debt or secured debt 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.