secured debt in bankruptcyWhen it comes to bankruptcy, not all debts are the same. There are two different kinds of debts—unsecured and secured debts. In bankruptcy, only your unsecured debts are discharged. That may leave you with the question: What happens to my secured debts?

Secured versus Unsecured Debts

A secured debt is one that is attached to some sort of collateral. This collateral protects the lender or creditor in case you fall behind on your payments. The most common secured debts are mortgages and car loans. If you fall behind on your mortgage, the bank can foreclose on it and sell the home to try and get some of their money back. Same with a car. If you don’t make your payments, the car can be repossessed.

Unsecured debts, on the other hand, have no collateral tied to them. Unsecured debts include credit card debt, student loans, or payday loans. These are the debts that are the types of debts that can be discharged after your bankruptcy. There are a few exceptions to this, such as child support and student loans that are less than seven years old.

Secured Debts in Bankruptcy

Unlike unsecured debts, secured debts aren’t automatically discharged in bankruptcy. Each situation is different. Only your bankruptcy trustee can tell you what exactly will happen to your secured debts. However, as a general rule, whether or not you get to keep your secured debts during your bankruptcy depends on a number of factors.  These include:

  • The amount of equity you have. During a bankruptcy, there are certain exemptions that are safe from seizure. Your home and vehicles may be exempt, depending on whether or not you have equity in them and how much is there. For example, if you have a home that is worth less than what you would have to pay to sell it, you have negative equity in your home. If you’ve paid off thirty thousand dollars off your principal, and your house value is the same as when you purchased it, you have thirty thousand dollars in equity.
  • Your province. Each province and territory has different laws regarding equity of secured debts and exemptions. In Alberta, for example, up to $40,000 of equity in your home is exempt. In Nova Scotia, however, there are no exemptions for your home.
  • Your payment status. If the amount of equity in your home or vehicle makes it exempt from seizure, you may be able to keep your secured assets if you can make payments on time. If you can’t afford it, the asset can be returned to the creditor.
  • Your budget. Even if you can keep your secured assets, it doesn’t always mean you should. If you can’t afford your monthly payments, you may be better off finding something more affordable.

Because every person’s situation is unique, your trustee can help you better understand what will happen to your secured debts in bankruptcy.

About - David was initially drawn to accountancy because he was ‘good with numbers’. He has been an insolvency professional since 1993. Soon after he began to work with debt issues he discovered that the most satisfying part of his role was the ability to make a positive difference in other people’s lives. It is the person, not the numbers that continues to guide his approach toward helping others deal with debt issues.