What is a secured creditor?
A secured creditor is a person or business that loaned you money with the condition that if you failed to repay the debt they had a right to one (or some) of your possessions. Loans secured in this way are known as secured debts. Some examples of secured creditors would be:
- The financial institution that holds your mortgage (if you don’t make your payments then the creditor may take possession of and sell your house);
- The financial institution that holds your car loan
- A leasing company;
- A rent-to-own company;
- A finance company; and
- Any other creditor that you pledge your possessions to in order to receive credit.
Why are secured creditors important?
The most important thing to understand about secured creditors is that secured debts are not included in your bankruptcy proceedings. The Bankruptcy and Insolvency Act only pertains to unsecured debts.
If you have any secured debts at the time you file bankruptcy, you will still be required to make payments towards those debts up to the fair market value of the items they hold as security. If you stop making payments they can take action to ‘seize’ the asset you pledged as security for the loan you received. A “lien” is the technical term for pledging any asset as security for a loan.
Your secured lender could take any of the following actions if you file for bankruptcy (we will use a secured loan against a car as an example)
- If your car is worth approximately what you owe your secured lender then they will probably ask you if you wish to continue making your regular payments;
- If your car is worth less than you owe, you will have to negotiate with your lender to pay them the fair market value of the car; or
- If your car is worth more that what you owe, your trustee can sell the car, pay off the secured lender with the balance going to your other creditors or you can negotiate with the trustee to pay the excess over the loan amount and you can continue to make your payments to your secured lender.
In our example, we could have used a boat, furniture, savings bonds, even your house.
If you pledged an item as security to obtain credit and you file personal bankruptcy in Ontario, your secured creditors are entitled to the fair market value of the item or the item itself.