Bankruptcy eliminates all of your unsecured debt. That can include credit card debt, bank loans, tax debts, unpaid bills and payday loans. One debt that is not included in a bankruptcy is “secured” debt.
A secured debt is where you’ve pledged something you own, like your home or your car, as collateral for your loan. This reduces the risk to the lender of loaning the money to you, because if you don’t pay they start action to seize your asset. They then sell the asset and use the funds to pay off your loan. The advantage to you of a secured loan is that you probably are charged a lower interest rate than you would be on an unsecured loan.
Loans that are typically secured loans, and therefore not eliminated as part of your bankruptcy, include:
- secured car loans or cars under lease
- home equity loans or lines of credit
- secured bank loans
Secured debts are NOT automatically discharged in a personal bankruptcy in Ontario. If you go bankrupt, your mortgage remains, as does your car loan. You can choose to give back your asset and let the creditor file a claim in your bankruptcy for any amount they cannot recover from the sale of the asset, but you don’t have to. If you prefer you can keep your mortgaged home or financed car, usually as long as you can maintain the payments.
One of the steps a secured lender must take is to validate their interest in the asset you put up for collateral. In Ontario, they do this through provincial legislation known as the Personal Property Security Act or PPSA for short.
Why is this important to your bankruptcy? Because if your secured creditor FAILS to register their interest in the asset properly, then they do not have a valid claim to that asset. That means that the trustee can now claim that asset, and your lender becomes an unsecured creditor. Your trustee will verify all of your secured creditors’ claims during your bankruptcy to ensure they are valid.
Involuntary liens are secured claims that happen due to legal reasons. You did not have to sign any agreement, but these creditors also have the right to file a interest against assets you own for unpaid debts. These can include:
- property tax debts;
- liens for unpaid income taxes;
- landlord liens for unpaid rent;
- judgement liens; and
- liens for certain unpaid work on your assets, called mechanic’s liens.
Again, this is important because these debts are NOT forgiven in your bankruptcy.
Since the determination of secured and unsecured claims can be quite complicated, it is important to talk to a bankruptcy trustee, In addition, how you choose to deal with secured debt can differ between a bankruptcy and a consumer proposal. We recommend you contact an Ontario bankruptcy trustee for more information about your situation.