You may have heard that not all debts are wiped out (“discharged”) in bankruptcy. This is true.
If you are considering bankruptcy, one of the first questions to consider is which debts can be wiped out in your particular case.
To answer this question, you will need to consider what kind of debts you have.
Some debts are “secured debts,” some are “unsecured debts,” and some are “priority debts” in bankruptcy. This post briefly discusses how secured debts are treated in bankruptcy.
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Secured Debt in a Chapter 7 or Chapter 13 Bankruptcy: What is It?
Secured debt is debt that is attached to (“secured” by) an asset. The asset can often be repossessed if you don’t make payments on the debt as agreed. An example of secured debt is a car loan in which the debt (the car note) is secured by the car.
Secured debt is said to have two “parts.” One part of the debt is your personal liability for paying the debt. The other part of the debt is the creditor’s right to take back (repossess or foreclose) the property securing the debt if you don’t make payments.
Secured debt might also be in the form of a lien on your property. An example would be court judgments against you that have been reduced to liens on your property. There are other kinds of liens as well; for example, mechanic’s liens, tax liens, or liens for unpaid child support.
What Happens to Secured Debt in a Chapter 7 or Chapter 13 Bankruptcy?
Personal liability for some secured debts can be eliminated in a bankruptcy. But, sometimes the creditor keeps the lien portion of the debt even after the bankruptcy. The creditor can use the lien to enforce debt.
For example, you may not be personally liable for paying your mortgage if the mortgage debt is discharged in a bankruptcy. But, after bankruptcy, the lender keeps the lien on your house and can foreclose if you stop making payments.
Can I Remove a Lien in a Chapter 7 or Chapter 13 Bankruptcy?
Some liens can be removed (“avoided”) during bankruptcy, but this is not automatic process. Some liens cannot be avoided in bankruptcy.
Some liens can be avoided in Chapter 13 bankruptcy, but not in Chapter 7 bankruptcy.
What Options do I Have for Dealing with Secured Debt and Property in Chapter 7 or Chapter 13 Bankruptcy?
If you owe money on a secured debt such as a car loan, you usually have three options for dealing the debt in bankruptcy:
- Return the property to the creditor; or
- Keep the property, continue making payments, and attempt to reaffirm the loan; or
- Pay the creditor a lump sum amount equal to the current replacement value of the property (this is often referred to as “redemption,” and is only available for certain secured debts.)
Do Options 1-3 Above Apply to All Secured Property in Bankruptcy?
No. You generally do not need to attempt to reaffirm mortgages on your primary residence in bankruptcy.
Most people who want to keep their houses during and after their bankruptcy simply keep making mortgage payments without reaffirming the mortgage debts.
This approach only works with certain kinds of secured debts, however. You will want to discuss very carefully with your attorney the options available in your particular case.