Skip to Main Content

Unsecured and secured creditor options for collecting debts

A creditor is anyone to whom you owe money. Creditors can include friends, family, credit card companies, and banks. Unpaid creditors have a number of options to collect unpaid debts. Creditors have different rights and options depending on whether they are unsecured or secured creditors.

Rights of secured creditors

A secured creditor is one who loaned you money in exchange for a written promise to give them some of your property if you did not pay them back. You may have received a loan to purchase a car only if you signed an agreement to give the car to the lender if the loan went unpaid. In that example, the lender is a secured creditor and the car is called collateral or security.

If you stop making payments on a secured loan, the lender may have to give you some advance notice before taking any further action. After the notice period expires, the secured creditor may sell the collateral, i.e. the car in the above example, in order to collect the money it is owed.

What if the creditor does not recover enough from the sale to repay the amount you owe? In that case, the unsecured creditor may sue you for the outstanding balance on the original loan, plus interest.

Rights of unsecured creditors

An unsecured creditor is a lender who loaned you money without taking any collateral in return. An unsecured creditor cannot automatically take and sell any property from you in order to recover the loan. An unsecured creditor must first sue you for the unpaid debt.

Once the unsecured creditor obtains a judgment, the creditor may collect it by asking the sheriff to take property from you and sell it to recover the debt. The creditor may also ask the sheriff to collect the judgment by garnishing your wages or bank account.

Garnishment is when money is deducted from your paycheque or taken from your bank account for your creditor. Ontario’s Payment of Wages Act limits garnishment to 20 per cent of your net wages, unless the debt relates to child or spousal support. In that case, the maximum that can be garnished is 50 per cent of your net wages.  Those are the maximums that can be garnished. The specific amount that may be garnished can be determined by the court depending on your financial circumstances.

If a creditor is threatening to sue you or has obtained judgment against you, it is important not to ignore them. It is in your interest and that creditor’s interest to arrange a payment of your debt. You may be able to agree to a payment schedule or compromise. If you do develop a payment schedule or compromise, be sure to put it in writing signed by you and your creditor.

If you are unable to reach written agreements with your creditors, consider obtaining credit counseling or legal advice, or consulting with a bankruptcy trustee.

Read more:

Secured Debts vs Unsecured Debts in Bankruptcy in Canada

You are owed money