Types of Debt | Cameron-Okolita Inc.

TWO TYPES OF DEBT

In order to assess the nature of the debts you have and how they are affected in a bankruptcy, one needs to know the type of contract you signed and the terms and conditions imposed in the agreement. Generally speaking, there are two types of debts, unsecured and secured debts.

UNSECURED DEBTS

Unsecured debts are often referred to as trade debts and typically include credit cards, lines of credit, overdrafts, utility and regular everyday bills most of us have to pay each month. In a bankruptcy, unsecured creditors are unable to enforce their claim against you and automatically upon filing your assignment in bankruptcy you are granted a Stay of Proceedings providing you with legal protection from these creditors. Unsecured contracts are terminated by a bankruptcy, and if you receive a discharge from bankruptcy, their ability to collect is permanently cancelled.

SECURED DEBTS

Secured debts often originate with the purchase of a significant asset such as a car, home, recreational vehicle, etc., etc., and are supported by a security agreement which allows the creditor to repossess or take back the asset(s) if you fail to make your payments or break the terms of your agreement with that creditor. Examples of secured debts include Car Loans/Leases, Home Mortgages, Rent to Own and Installment purchase contracts, where an asset is pledged or given up as security or given as collateral to be taken back if you do not pay. If you go bankrupt and do not pay, the creditor cannot make you pay, and their recourse or chance of recovery is limited to the pledged asset(s) itself.

If you get or have a consolidated loan it is very likely that the creditor has taken security and placed a lien on your asset(s). If you have made all your payments and go bankrupt a creditor cannot repossess the asset.

If a person wants to keep an asset, it is important to keep a good relationship with that creditor. If you owe significantly more than the asset is worth, you should consider surrendering the asset, with the result that you have no further obligation to pay.

CO-SIGNERS / GUARANTORS

In some cases, creditors may have taken a guarantee or had someone co-sign on your behalf. If you go bankrupt the creditor will focus their collection action on your co-signer and they will have to pay that debt. In many cases, co-signers and guarantors are family members or persons related to the borrower.

If a person goes bankrupt and you receive a discharge from bankruptcy, you are, as a discharged bankrupt, at liberty to pay back your relatives or any other party you choose. As a discharged bankrupt, you have no legal obligation to pay or reimburse any creditor, however, repayments to a relative after you have received a discharge are gratuitous payments made by you which you are under no legal obligation to make.

GOVERNMENT DEBT

Government debts in many cases are treated exactly the same as unsecured debts in a bankruptcy and include Income Taxes, GST and directors’ liabilities for unpaid company debts.

HRDC debts, WCB, or Employment Insurance benefits received while ineligible are however, treated very differently. The obligation for monies you received and consumed while you were ineligible will survive a bankruptcy and must be repaid, in most cases after you receive your discharge from bankruptcy.