Secured vs. Unsecured Debt in Canada: What It Means for Your Proposal or Bankruptcy

Secured debt has collateral attached — your home, your car, your property. Unsecured debt has no collateral. That single difference controls everything about what a consumer proposal or bankruptcy can do for you. Both proceedings deal primarily with unsecured debt. Secured debt stays outside unless you surrender the asset. Most people’s worst debts — credit cards, payday loans, personal loans — are unsecured. That means a proposal can reduce or eliminate them while leaving your mortgage and car loan untouched.

Secured Debt: You Put Up Collateral

A debt is secured when a lender has a legal claim against a specific asset. If you stop paying, the lender can seize that asset. The Bankruptcy and Insolvency Act (BIA) treats secured creditors as a separate class with priority rights.

Common secured debts in Canada:

• Mortgage — the lender holds a charge against your home
• Car loan — the lender holds a security interest in the vehicle
• HELOC (home equity line of credit) — secured against your home’s equity
• Equipment loans — the financed equipment is the collateral
• CRA Certificate of judgment — when CRA registers a lien on your property, that tax debt becomes secured against it
• Judgment lien — when a creditor wins a court judgment and registers it against your property

The key word is registered. Secured creditors have a formal legal claim on a specific asset. That claim does not disappear because you filed a consumer proposal or went bankrupt.

Unsecured Debt: No Collateral, Different Rules

Unsecured creditors lent you money without taking a claim on any specific asset. If you stop paying, they can sue you and get a judgment — but they cannot simply take your car or your furniture. They have to go through a legal process.

Common unsecured debts in Canada:

• Credit cards
• Unsecured personal lines of credit
• Personal loans (without collateral)
• Payday loans
• Student loans (federal and provincial)
• Most CRA income tax debt (before any lien is registered)
• Medical debt
• NSF fees and overdraft charges
• Collection accounts
• Unpaid utility bills

These are the debts that consumer proposals and bankruptcies are built to handle. Under the BIA, only unsecured creditors vote on a consumer proposal and receive dividends. They are the creditors who have the most to gain from accepting a negotiated settlement.

What a Consumer Proposal Can and Cannot Touch

A consumer proposal is a legal offer to unsecured creditors. You propose to repay a percentage of what you owe — often 20 to 50 cents on the dollar — over up to 60 months. If creditors holding the majority of your unsecured debt by value vote yes, the proposal binds all unsecured creditors.

What is included:

• Credit card balances
• Unsecured lines of credit
• Personal loans
• Payday loans
• Unsecured CRA income tax debt
• Deficiency balances after asset repossession (more on that below)

What is excluded:

• Mortgage — you keep making payments or you lose the home
• Car loan — you keep paying or the lender repossesses
• HELOC — it is secured against the home; it stays outside
• Any debt where CRA has already registered a lien

Your Licensed Insolvency Trustee (LIT) will review every debt at your initial consultation and sort them into secured and unsecured. That list determines exactly what your proposal can cover. There is no guesswork — the BIA definitions are clear.

Ready to find out which of your debts qualify? Find a Licensed Insolvency Trustee near you →

The HELOC Mistake Many People Make

A home equity line of credit feels like a credit card. You draw on it, pay it back, draw again. Many people assume it works the same way in a consumer proposal. It does not.

A HELOC is registered against your home as a secured charge. Under the BIA, it is treated exactly like a mortgage for proposal purposes. Your LIT cannot include it in the proposal. The HELOC lender does not vote. The HELOC lender is not bound by the proposal outcome.

Real-world scenario — Priya, 44, Brampton, Ontario:

Priya had $38,000 in credit card debt and a $52,000 HELOC on her home. She assumed her LIT could wrap everything into one consumer proposal payment. Her credit cards — included. Her HELOC — not included. The HELOC lender holds a registered charge against her home in Brampton. Priya’s proposal covered the $38,000 in credit cards and reduced that debt to $14,000 payable over 48 months. She still owes every dollar of the $52,000 HELOC and must keep making those payments. The proposal gave her real relief on her worst debts, but the HELOC was never on the table.

If Priya had surrendered her home, the HELOC balance could have been wiped out (or a deficiency balance included as unsecured). But she wanted to keep the house. That meant keeping the HELOC.

When Secured Debt Becomes Unsecured: Deficiency Balances

Here is where things get more useful for people who have already lost an asset.

When a secured lender repossesses an asset and sells it, they apply the sale proceeds to the loan balance. If the proceeds are less than the balance, the gap is called a deficiency balance (also called a shortfall). At that point, the lender no longer has collateral. The deficiency converts from secured to unsecured debt.

Unsecured debt can be included in a consumer proposal or bankruptcy.

Real-world scenario — Derek, 37, Saskatoon, Saskatchewan:

Derek owed $24,500 on a truck loan. The lender repossessed the truck after he missed four payments and sold it at auction for $11,000. The deficiency: $13,500. The lender sent Derek a demand letter for $13,500. Derek had no truck and owed a $13,500 unsecured debt on top of $19,000 in credit cards. Total unsecured: $32,500. A LIT in Saskatoon helped Derek file a consumer proposal offering $8,000 over 48 months — roughly 25 cents on the dollar. The $13,500 deficiency balance was included in the proposal. Both the truck lender and the credit card companies were bound by the same vote.

The same rule applies to mortgages. In provinces that allow power of sale (Ontario, Alberta, BC) or foreclosure, if a home sells for less than the mortgage balance after a default, the mortgage shortfall can become an unsecured deficiency claimable in a bankruptcy or proposal. Provincial variation matters here: power-of-sale provinces (Ontario uses this most commonly) tend to process faster than foreclosure provinces. Ask your LIT how your province handles mortgage enforcement.

CRA Debt: Unsecured Until It Isn’t

Most CRA income tax arrears, GST/HST debt, and payroll remittances start as unsecured. They can be included in a consumer proposal and significantly reduced.

But CRA has a legal tool that changes the picture: the Certificate of judgment. When CRA registers a certificate against your real property, the tax debt is attached to that specific asset. It becomes secured. Once secured, it cannot be included in a proposal unless you surrender the property.

If you own real estate and have significant CRA debt, your LIT will search for registered liens before advising you on what can be included. Do not assume all CRA debt is unsecured just because it started that way.

Secured vs. Unsecured at a Glance

Joint and Co-Signed Debt: What the Proposal Covers

If you co-signed a loan or are a joint account holder, both parties are each 100% liable for the full balance. A consumer proposal covers your personal liability on that debt. It does not release your co-signer.

Example: You and your sibling co-signed a $15,000 personal loan. You file a consumer proposal and that loan is included. Your obligation to the lender is resolved through the proposal. Your sibling still owes the lender the full $15,000. The lender can pursue your sibling for the entire balance. A proposal is not a shield for anyone else on the debt.

What to Do Next

Most Canadians with serious debt have a mix of secured and unsecured obligations. The good news: the debts that are most crushing — credit cards at 20–29% interest, payday loans, unsecured personal loans — are almost always unsecured. A consumer proposal can cut those balances dramatically, stop interest, and end collection calls.

The secured debts (mortgage, car) stay intact if you keep paying them, which is often exactly what people want. You do not have to lose your home or your car to get relief from $40,000 in credit card debt.

The first step is a consultation with a Licensed Insolvency Trustee. They will review your full debt picture, separate secured from unsecured, and tell you exactly what a proposal or bankruptcy would cover in your specific situation. The consultation is free and confidential.

Find a Licensed Insolvency Trustee near you →