Secured Debt & Chapter 7 Bankruptcy

December 10, 2010

Secured Debt & Chapter 7 Bankruptcy

Most people have secured debt associated with either their home or car. These are often the biggest purchases an individual makes and are usually purchased with a secured loan. This is where the lender takes a security interest in the asset purchased which protects the lender until the loan is paid.

So, what happens to secured debt when the borrower/purchaser files bankruptcy?  The lender is a secured creditor, with rights in the asset that is the collateral as well as rights against the borrower.  The general rule in a Chapter 7 bankruptcy is that liens are not altered by the bankruptcy or the discharge of the borrower’s personal liability.  In other forms of bankruptcy the liens may be “stripped” but not with a Chapter 7.  In most cases, if the Parties wish to retain the asset, they can “reaffirm” the loan, otherwise the lien will remain.

If you end up filing for bankruptcy you need to assume that the lender does not want the collateral back:  the lender wants money.   So, if you are willing to continue paying on the contract or loan, the secured creditor is generally delighted:  they are not looking for ways to dispossess you, unless you don’t pay.

Secured debt has two elements: (1) your promise to repay your loan, and (2) a lien on the property, ie collateral. When you file for chapter 7 bankruptcy, your personal liability will be wiped off the books for all of your loans that are eligible to be discharged. But any lien that was placed on your property will remain. That means it is necessary for you to actively address the liens on your property. Chapter 7 gives several options on how to address your liens. Some of the most prominent examples are that you can reaffirm the debt, redeem the property, abandon the property, or, in some jurisdictions, simply continue making payments.

If you find yourself overwhelmed with debt, filing for chapter 7 bankruptcy might be what you need to get a fresh start. However, filing for chapter 7 bankruptcy is not always the right solution, so it’s important to get the right advice. For more information on bankruptcy I offer a free initial consultation where you can your questions answered and find out whether filing for chapter 7 bankruptcy is right for you.

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