Updated: April 2025  |  bremo.io financial guides

Secured vs Unsecured Debt in Canada: Explained

Understanding whether your debt is secured or unsecured is fundamental to understanding how it can be managed, what happens if you default, and what formal debt relief options are available. The distinction shapes everything from the interest rate you're charged to whether the debt can be included in a consumer proposal.

What Is Secured Debt?

Secured debt is debt backed by collateral — an asset that the lender has the legal right to seize if you default. The "security" protects the lender's interest.

Common examples of secured debt in Canada:

• Mortgage: Secured by the property being purchased. If you default, the lender can foreclose.
• Home Equity Line of Credit (HELOC): Secured by the equity in your home.
• Car loan or auto financing: Secured by the vehicle. Default allows the lender to repossess.
• Secured line of credit: Backed by a specific asset as collateral.
• RRSP-backed loan: Some loans are secured against registered assets.

Because secured creditors have collateral backing, they face less risk — which is why secured debt typically carries lower interest rates than unsecured debt.

What Is Unsecured Debt?

Unsecured debt has no collateral. If you default, the creditor has no asset to seize directly. They can only sue you, obtain a court judgment, and then pursue enforcement (wage garnishment, bank account seizure).

Common examples of unsecured debt in Canada:

• Credit card balances
• Unsecured personal loans
• Unsecured lines of credit
• Payday loans
• Medical bills
• CRA tax debt (in most situations)
• Student loans
• Utility arrears

The higher interest rates on credit cards (19.99%) compared to mortgages (current rates of 4–6%) directly reflect the difference in risk between unsecured and secured lending.

Why the Distinction Matters for Debt Relief

Consumer Proposals

A consumer proposal deals only with unsecured debts. If you file a consumer proposal:

• All unsecured creditors are legally bound (once accepted)
• Secured creditors are NOT included — you must continue payments on your mortgage and car loan as usual
• If you fall behind on secured debt during a proposal, the secured creditor can still pursue their collateral

Bankruptcy

Bankruptcy also primarily discharges unsecured debts. Secured creditors retain their security interest. If you are bankrupt and stop paying your mortgage, the lender can still foreclose. If you want to keep a secured asset (home, car), you must continue making those payments.

Priority of Debts in Insolvency

When it comes to creditor priority, secured creditors come first in insolvency — they can exercise their security rights regardless of the proceedings. After secured creditors, there is a hierarchy among unsecured creditors as well:

• Preferred creditors: Employees for wages, landlords for rent arrears (in some situations), certain government claims
• Ordinary unsecured creditors: Banks, credit card companies, collection agencies

Secured Debt and Insolvency Options

People often mistakenly believe they cannot file a consumer proposal if they have a mortgage or car loan. This is incorrect. You can file a consumer proposal to deal with your unsecured debts while maintaining your secured debts normally. Many Canadians successfully use consumer proposals to eliminate credit card and loan debt while keeping their home.

The key is being able to afford both the proposal payments and the secured debt payments. A LIT will review this in your free initial consultation.

Converting Unsecured Debt to Secured: Risks

Using home equity to pay off credit cards (converting unsecured debt to secured) is a common strategy that comes with significant risk. If you cannot maintain the mortgage or HELOC payments, you now risk your home — which was not at risk when the debt was unsecured. This conversion requires careful consideration.