What Happens to Secured Debt When You File Chapter 7

Filing for Chapter 7 bankruptcy can be a complex process, but understanding what happens to secured debt can help you navigate it more smoothly.

Most secured debts, such as mortgages or car loans, are not discharged in Chapter 7 bankruptcy.

You may be able to keep your secured property, but you'll still be responsible for making payments on the loan. This is because the lender has a lien on the property, which gives them a claim to it until the debt is paid off.

The court will review your secured debts and determine which ones are eligible for discharge, but this is relatively rare.

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Secured debt can be a complex issue in Chapter 7 bankruptcy, but understanding the basics can help you navigate the process.

A secured debt is a loan that you guarantee with collateral, which is an asset of value that will secure the debt. This means that if you fail to repay the loan, the lender may take possession of the asset.

Expand your knowledge: Share Secured Loan

You have a legal obligation to pay what you owe when you secure a loan, and the lender has the right to recover property through a lien. This lien gives the lender the right to repossess your vehicle or foreclose on your home if you fail to make payments.

You may be able to surrender the property to the bank and discharge the debt in Chapter 7 bankruptcy. Alternatively, you can choose to continue making payments and retain the property, or redeem the property by paying a lump sum equal to the current market value.

However, if you are behind on your secured debt payments, you will likely have no option to retain your property in Chapter 7 bankruptcy. This is because there is no way to pay money owed in arrears in Chapter 7.

In some cases, you may be "upside down" with your loan, meaning you owe more than the property is worth. If this is the case, you may be able to redeem the property by making a lump-sum payment in an agreed-upon amount to the debtor.

A creditor must submit a proof of claim, which includes a copy of the contract providing for the security interest and any type of lien, including a mortgage or security deed. The lien must be perfected by filing the lien with the appropriate authorities, such as the County Clerk's office for real estate.

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Your need to pay a secured debt, such as a mortgage or car payment, will probably be eliminated if you file for Chapter 7 bankruptcy. However, the creditor can still seize the collateral if you don't pay what you owe.

You can seek the court to set aside a judgment lien that prohibits you from benefiting from an exemption. For instance, you may seek the court to remove the lien on up to $15,000 of your property equity if an exemption allowed you to keep the remaining $15,000 of equity.

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A reaffirmation agreement is a contract between you and your secured creditor that allows you to continue owing on a debt after your Chapter 7 bankruptcy case closes.

You may want to sign a reaffirmation agreement to keep property that secures the secured creditor's debt or to avoid having the secured creditor pursue the guarantor. The secured creditor can benefit significantly, as you'll continue making payments after the bankruptcy case closes, the underlying security interest remains in place, and the secured creditor's overall chances for recovery are improved.

The secured creditor can repossess the property and bill you for the deficiency balance if you default on payments after bankruptcy. The creditor can sue for a deficiency balance in nearly all states, but about half of the states don't allow it for repossessed personal property if the original purchase price was less than a few thousand dollars.

Here are some key things to consider when entering into a reaffirmation agreement:

A Reaffirmation Agreement is a contract between you and your creditor where you promise to continue owing them after your bankruptcy case closes. This can be a helpful tool for both parties.

You might want to sign a Reaffirmation Agreement if you want to keep the property that secures the secured creditor's debt. For example, if you owe $25,000 on your car before filing for Chapter 7 bankruptcy, you'll likely still owe $25,000 on your car after you file for bankruptcy.

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The secured creditor can benefit from a Reaffirmation Agreement as well. With the agreement, you'll continue making payments after the bankruptcy case closes, and the creditor's chances of recovery are improved.

However, signing a Reaffirmation Agreement can also have some downsides. You'll still be personally liable for the debt, even if the property is damaged or destroyed. This means you can't walk away from the debt after bankruptcy and will still have to pay the deficiency balance.

Here are some scenarios where a Reaffirmation Agreement might be necessary:

It's also worth noting that a Reaffirmation Agreement can be rejected by the bankruptcy judge if it's not in your best interest or would create an undue hardship for you or your family.

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A consensual lien is one you've agreed to by contract or agreement, and if you miss payments, the creditor can take possession of the collateral and sell it. This can be a mortgage or an auto loan, which are common examples of secured loans.

If you default on payments, the lender has the right to repossess the property and sell it. This is because these liens usually can't be eliminated by bankruptcy.

Consensual liens are typically secured by a specific item, like a house or a car, that you're using the loan to purchase. This is why they're often referred to as purchase-money security interests.

These types of liens are usually non-possessory, meaning the lender doesn't have possession of the collateral. This is different from possessory loans, like those from pawnshops, where the lender takes possession of the item in exchange for the loan.

For another approach, see: Purchase Formula 7

Secured debt is created when a lender requires a borrower to put up collateral, such as a valuable property, that it can sell if the borrower fails to pay their bill. This collateral creates a lien on the property, giving the creditor the right to repossess it if payments are missed.

A fresh viewpoint: Security Collateral

A secured creditor has a lien interest in the collateral, which allows them to sell the property to pay off the debt. This is why secured creditors get paid first in bankruptcy cases.

Secured debt is often used for large loans, such as mortgages or car loans. The lender requires collateral to ensure they get paid if the borrower defaults on the loan.

Related reading: Mortgage Loans after Chapter 7

In Chapter 7 bankruptcy, exemptions play a crucial role in determining what assets you can keep. You can protect some assets, but there are restrictions, and the exemptions that your state permits will also determine whether you are eligible to maintain a certain asset.

Your state's exemptions will determine the amount of equity you can keep in a secured asset, such as a car or a home. For example, if you owe $3,000 on a car worth $6,000, and your state's vehicle exemption allows you to save $1,000, you likely won't be able to keep the vehicle.

On a similar theme: What Is the Debt to Assets Ratio

If you have secured debt, you have several options in Chapter 7 bankruptcy. You can surrender the property to the bank and discharge the debt, continue making payments and retain the property by reaffirming the debt, or redeem the property by paying a lump sum equal to the current market value.

Not all creditors require a borrower to provide security when making a loan or providing a credit service. An "unsecured" creditor doesn't have a lien interest in collateral, so it can't sell the borrower's property to pay off the debt without doing more.

Some liens can be stripped, but only certain liens can be removed. A security interest can be voided only if the security interest on the loan is a nonpurchase-money security interest, or the property pledged is exempt. A judicial lien can be avoided if the property is exempt, and the lien, if honored, will deprive you of your full exemption.

Here are some examples of exempt property:

If you don't have equity in the property, you may be able to redeem the property by paying a lump sum equal to the current market value. In some cases, you may be "upside down" with your loan, meaning you owe more than the property is worth.

Secured debt is a type of loan where you use an asset as collateral, such as a home, car, or other valuable property.

The creditor has a lien on the asset, which means they have the right to take possession of it if you fail to repay the loan.

A secured debt is created when you agree to use an asset as security for the debt's repayment, and the creditor has the right to seize the asset if you stop making payments.

If you're behind on your secured debt payments, you'll likely have no option to retain your property in a Chapter 7 bankruptcy, as there's no way to pay money owed in arrears.

You can protect some of your assets using a bankruptcy exemption, but you must have equity in the property to qualify for an exemption.

In some cases, you may be "upside down" with your loan, meaning you owe more than the property is worth, and you may be able to redeem the property by paying a lump sum equal to the current market value.

If you don't have equity in the property, the trustee won't be able to sell it, but you might be able to keep the asset by redeeming it or reaffirming the debt.

Reaffirmation provides a way to keep collateral as long as you abide by the terms of the reaffirmation agreement and keep up your payments.

A lien is a contract that grants the creditor a "lien", or ownership stake in the property, and it's not automatically eliminated by Chapter 7 bankruptcy.

Even if the creditor cannot physically force you to pay your debt, if you refuse to do so voluntarily, the creditor may seize your property, as a secured transaction includes two main components: your duty to reimburse the creditor and the creditor's ability to reclaim the collateral through the lien.

In Chapter 7 bankruptcy, a secured creditor can recover the full amount of their debt, including interest and attorney's fees, to the extent that they are secured. However, there are exceptions where the Trustee may be able to avoid certain liens.

Cramdowns are an option in Chapter 7, but they're subject to restrictions. You can only apply a cramdown to personal property purchased more than 1 year before filing, or automobiles purchased before 910 days (or 2.5 years) before filing.

To illustrate this, let's consider the following table:

In a Chapter 7 bankruptcy, a secured creditor can't recover their collateral until it can be done without harming the debtor or other creditors. This means that if the collateral is perishable, the creditor may need to wait or find an alternative solution to maximize its value.

Cramdowns allow you to pay the replacement value of a secured item instead of the full amount, and in some cases, own the property free and clear. This can be a significant advantage in bankruptcy proceedings.

You can spread payments over time as part of a Chapter 13 repayment plan, rather than making a lump sum payment required in Chapter 7. This can make the process more manageable.

Cramdowns are restricted by the Bankruptcy Act of 2005, which prohibits them for real estate, except in special cases.

Recovery under Chapter 7 bankruptcy is a complex process, but it's essential to understand the two basic principles that guide it.

A secured creditor is entitled to 100% of the outstanding debt, including interest and attorney's fees, to the extent that they are secured. This means your client may even recover fees owed for services.

However, there are exceptions where the Trustee may be able to avoid certain liens, such as fraudulent transfers or liens subject to equitable subordination.

A secured creditor cannot recover their collateral until it can be done without injury to the debtor or other creditors unless delay would create a serious risk of loss.

For example, if the collateral is perishable goods, the court may decide that allowing the creditor to liquidate outweighs any delays.

Evaluating the creditor's position is a crucial step in understanding what happens to secured debt in Chapter 7. You need to determine if the security interest is valid and perfected, which can be confirmed by running lien searches.

Is the security interest valid? If not, you're in a stronger position. If it is, you should investigate whether the first position lienholder is perfected, as this can give your client an advantage.

To determine if the secured creditor is vulnerable to a preference action, you need to ask questions like when the lien was perfected and what's the relationship between the debtor and the secured creditor. If the secured creditor is an "insider" of the debtor, the lookback period is extended to one year.

The value of the collateral is also crucial. Sometimes expert opinions are required to determine its value, and you should investigate any underlying risks to the value in case you need to file a motion for relief from the automatic stay.

To ensure your client receives adequate protection, you should seek interest payments, insurance, or additional collateral if they're not entitled to foreclose on the collateral.

Here are some key questions to consider when evaluating the creditor's position:

The Statement of Intention is a crucial form you'll need to file in bankruptcy to inform the court and your creditors about your plans for secured debt. You'll have to decide whether to surrender, redeem, or reaffirm each secured item.

You'll have 30 days after filing for bankruptcy to file the Statement of Intention, or the automatic stay will be lifted for secured debt. If you don't follow through with your plan within 45 days after the creditors' meeting, the automatic stay will also be lifted.

In a Chapter 13 bankruptcy, you can keep all secured property if you continue making payments on the debt and pay your other debts. This is one of the benefits of Chapter 13, which allows you to repay debt over a 3- or 5-year period.

You can choose to surrender the property, pay the current replacement value of the item, or continue to pay as agreed in Chapter 13. This gives you more flexibility than Chapter 7, where you'd need to pay arrearages as a lump sum.

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