Secured Debts in Bankruptcy Cases
Secured debts are loans attached to some type of property, such as a mortgage on a house, an auto loan, or furniture purchased in a furniture store.
When you buy the property and need financing, the creditor lets you buy the property but hold back what is called "a security interest." What this does is permit the creditor to repossess your property should you fail to make payments. In such a case, the car is repossesed or the home is foreclosed.
In Bankruptcy secured debts are treated very differently than unsecured debts. Generally, if you have kept up with you payments on the secured deb then you will be able to keep the secured property. On the other hand, if you are behind on payments, then in most cases you will not be able to keep the secured property.
Examples of secured debts are home mortgages, home equity lines of credit, and car loans. These secured debts are liens. This means that the creditor is secured, and that there was a legal agreement to secure the debt. Liens determine the rights a creditor may have in the debtor's property, secured by the lien.
The following is a list of various forms of liens:
Security Interests: This is the usual agreemetn signed by the purchaser when the selleer finances the purchase. Credit plans by retailers such as Sears and Home Depot provide the seller a security interest in the products when you purchase. Once the security agreement is signed, the seller has the right to reclaim the goods if you discharge the debt through bankruptcy. You may however, keep the property if you agree to reaffirm the debt after the bankruptcy.
Look at the difference if you purchase something using your credit card instead of using the seller's own credit. In these cases, the item you purchased remain yours with no security interest favoring the lender/creditor.
Judgment Liens: In some cases were the creditor went to court and obtained a judgment, it creates a judgment lien on the debtor's property. These judgment liens would normally require a second step for the creditor (perfecting the lien) before they are protected in a bankruptcy.
Tax Liens: Once the government records a tax lien it is perfected on all of the taxpayer's property.
Blanket Security Interests: Sometimes, the creditor gets a security interest in all of your personal property. This is called a "blanket security interest" in all of your assets. It may include assets acquired after the security interest agreement is signed.
With the exception of some security interests in exempt household goods, the discharge does not remove a creditor's security interest.
What are you options during a bankruptcy if you have secured debts?
Chapter 7. In a chapter 7 Liquidation Bankruptcy, there are three options:
- Surrender the property securing the debt. The balance of the loan will be discharged. The balance of teh debt will be discharged in the Chapter 7 bankruptcy so the creditor cannot get a deficiency judgment. [11 USC § 523(a)(2)]
- Reaffirm the debt in order to keep property. All payments must be current. After you reaffirm the debt, if you miss payments, the creditor will be able to go back to the bankruptcy court, repossess the property and obtain a deficiency judgment. You will not be able to receive a benefit from the bankruptcy if this happens. So you must be very careful in reaffirming any debt. [11 USC § 524(c)]
- You may redeem the property by paying the present market value of the property in cash. In other words if you owe, let's say $1,500 for a computer, but now the value is $300, you will pay the $300 [11 USC § 722]
Chapter 13. In a Chapter 13 Debt Adjustment Bankruptcy, the plan approved by the court, replaces all payments normally paid on the secured debt except home mortgage payments and lease payments. In many such cases, You no longer make separate payments on financed vehicles, credit cards, unsecured debt, or taxes. In some cases were there is a second mortgage, it can be stripped off and converted to unsecured so that you only pay pennies on the dollars. Instead of paying a second mortgage for 30 years, you will pay it off in just 5 years without interest.
The chapter 13 bankruptcy plan pays off all the arrears on the mortgage or lease payments. If you intend to keep the home you will have to pay the regular mortgage plus the plan amount.
[11 USC § 1322]
