Debts falls into two types: Unsecured and secured.
Unsecured debt is money owed without using any of your assets (car, household items or a house) as a security to guaranty payment of money borrowed. Should you default on your payment, your creditor could not seize any of your assets unless your creditor sues you in the court of law and obtain judgment against you. Example of unsecured debt is money owed from the use of your credit cards and a loan or line of credit without collateral.
While secured debt on the other hand is a monetary obligation whereby you consented to use any of your assets as a collateral to guarantee payment of money borrowed. In most cases your creditor could seize the item used as security upon default of your payment without a need of going to the court of law to seek judgment against you. Example of secured debt is a car loan. In this loan, the car you purchased is used as a collateral of the loan. Mortgage loan is another example of secured loan—the house is the security.
Converting your unsecured debt to a secured loan is giving your creditor the right to confiscate your asset used as collateral in case you default your payment, which is to your disadvantage.
When your debt becomes secured, in case of serious financial crises you could not include a secured debt in credit counseling or consumer proposal because your creditor has the right to take over the item used as security and dispose it to pay for whatever outstanding debt you have.
Moreover, if you decide to file for bankruptcy, in order to keep the item you used as collateral you have to continue paying the creditor who holds a lien against your property otherwise, you will lose said property for the creditor would seize and sell it usually in public auction.
On the contrary, if the unsecured debt remained unsecured, you have a greater chance of keeping the property even if you went credit counseling, filed consumer proposal or even if you filed for bankruptcy.
When you are confronted with a situation where you are tempted to convert your unsecured debt to a secured loan cause by financial stress, it would be a wise move on your part to consult a professional who could give you proper advice as to your options rather than unnecessarily exposing your property to a risk of losing it to your creditor especially if the property is your house.
Adam Aspilla is a Senior Financial Counselor of the Debt Clinic of Canada Inc. and the author of the book, You Can Negotiate All Your Debts. He also writes a biweekly column, “What Matters In Life” in “Taliba Newspaper. For free initial, professional and confidential consultation, please call 905-306-7572.