Secured Debt in Chapter 13 Bankruptcy Explained

Secured debt in Chapter 13 bankruptcy can be a complex and intimidating topic, but understanding the basics can help you navigate the process with confidence.

In a Chapter 13 bankruptcy, you're allowed to keep your secured assets, such as your home or car, as long as you continue to make payments on the debt.

You'll need to make regular payments on your secured debt for the duration of your repayment plan, which is typically 3 to 5 years.

As long as you're making payments on your secured debt, you can keep your assets and rebuild your credit over time.

For more insights, see: Secured Credit Card Bad Credit with No Security Deposit

In a Chapter 13 bankruptcy, you might not have to pay the entire balance on your secured debt, thanks to a cramdown. This allows you to keep your property and reduce the amount you owe.

A cramdown can be used to reduce the amount of secured debt, which can be a huge relief for people struggling to make payments. You can learn more about cramdowns in Chapter 13 bankruptcy to see if it's an option for you.

In Chapter 13 bankruptcy, you might not have to pay the entire balance on your secured debt by using what's known as a cramdown.

This option can be applied to your property, and learning more details about cramdowns in Chapter 13 bankruptcy can be beneficial.

A cramdown allows you to keep your property, but you'll have to pay a reduced amount on your secured debt over time, rather than the full balance.

You'll need to submit a reorganization plan that outlines how you'll pay off your secured debt, as well as any other debts you're trying to eliminate.

Here are some key points to keep in mind:

The Statement of Intention is a crucial form you must file in bankruptcy to inform the court and your creditors of your plan for secured debt.

You'll need to decide whether to surrender, redeem, or reaffirm each secured item, and file this form to let everyone know.

The automatic stay will be lifted for secured debt if you don't file the Statement of Intention within 30 days after filing for bankruptcy.

This means creditors can start taking action again if you don't follow through with the plan within 45 days after the creditors' meeting.

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Debt can be overwhelming, but understanding the basics can help. Unsecured debt refers to loans that aren't backed by any collateral.

Credit card debt, medical bills, student loans, alimony, and personal loans are all examples of unsecured debt. If you've owned your car for over 910 days, you can consider reducing the balance to its fair market value.

Additional reading: Chapter 13 and Car Loans

A property lien is a creditor's interest in specific property, where ownership is evidenced by a legal title document. This can be a mortgage or security deed, auto lien, or UCC-1 Financing Statement, and is usually created by a contract or agreement.

To understand property liens, it's helpful to know the difference between consensual and nonconsensual liens. Consensual liens, also known as voluntary liens, are ones you consented to by agreement or contract. These can be purchase-money security interests, which secure loans where the money is used to purchase the security interest, or nonpurchase-money security interests, which are loans that are secured by an item that you already own.

For another approach, see: Redeem Property

A consensual lien can be eliminated in bankruptcy if the security interest is a nonpurchase-money security interest, and the property pledged is exempt. This means that you can keep the property and pay a percentage of the debt, rather than the full value of the property.

Nonconsensual liens, on the other hand, are liens imposed on titled property without your consent. These can be judicial, tax, or statutory liens, and are usually restricted to real estate and automobiles. Most judicial and statutory liens can be eliminated in bankruptcy, but not most tax liens.

Here are some common types of nonconsensual liens:

Only certain liens can be stripped in bankruptcy. To summarize, only nonpurchase-money security interests and judicial liens can be voided if the property is exempt.

If you're behind on payments for secured property, you can try to catch up by making up the missing payments and continuing to make regular payments. This might be possible if your creditors accept, but it's not always a guarantee.

You have a few options to keep secured property, including surrendering it, redeeming it, or reaffirming the debt. Surrendering the property involves giving it back to the lender, while redeeming it requires paying its replacement value in a lump sum.

If you want to keep the property, you can file for Chapter 13 bankruptcy, which allows you to keep all of your property if you can maintain payments. However, you must set up a payment plan that will pay all secured and priority payments, and at least 25% of your unsecured debt or the value of all of your nonexempt property, whichever is greater, over a 3- or 5-year period.

You can also try to strip liens from your secured property to reduce the amount you owe. This can be done by filing a motion to eliminate a lien, but you must do so within 30 days after you file for bankruptcy or before the creditors meeting.

Here are the three options for keeping secured property:

You can pay the replacement value of a secured item instead of the full amount, which is sometimes called a cram down. This can be a huge relief, especially if the item has depreciated in value.

In Chapter 13, payments for a cram down can be spread over time as part of the repayment plan, unlike in Chapter 7 where a lump sum payment is required. However, cramdowns have restrictions to deter fraud.

To qualify for a cram down, the property must have been purchased more than 1 year before filing, or an automobile purchased before 910 days (or 30 months, or 2.5 years) before filing. Real estate is not eligible, except in special cases.

For property not subject to a cram down, such as recently purchased property and real estate, you can continue to pay on the contract as part of your repayment plan.

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Cramdowns allow you to pay the replacement value of a secured item instead of the full amount, giving you property free and clear.

In Chapter 13, payments can be spread over time as part of the repayment plan, unlike the lump sum payment required in Chapter 7.

The Bankruptcy Act of 2005 restricts cramdowns to prevent fraud, limiting them to personal property purchased more than 1 year before filing.

Cramdowns can also be applied to automobiles purchased before 910 days (or 30 months, or 2.5 years) before filing.

Real estate is generally not eligible for cramdowns, except in special cases.

If you have a property that's not subject to a cramdown, you can continue paying on the contract as part of your repayment plan.

You can make payments outside of bankruptcy if your chapter 13 plan isn't completed.

If the collateral is destroyed, such as a car in an accident, your chapter 13 plan can be amended to reclassify the debt as unsecured.

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