Secured debts are created with liens. Liens can be voluntary or involuntary. Home mortgages and car loans are examples of secured debts that you incur voluntarily. Real property tax liens, by contrast, are involuntary liens.
Usually, you voluntarily agree to give a creditor a security interest in your property. For instance, as a condition for making a home loan, a lender typically requires you to sign a mortgage (or, in some states, a deed of trust). A mortgage or deed of trust is an agreement that grants a lender a security interest, or lien, against real property. The lien allows for a foreclosure auction if the homeowner falls behind on the monthly payment.
You can also grant a lender a lien against personal property, which is anything you own or have an interest in that isn't real estate (real property). Personal property includes vehicles, equipment, furniture, tools, inventory, shares of stock, other types of investment interests, and even cash.
Typically, you grant a lien against personal property through a security agreement. Before extending a new car loan, for example, a lender will require you to sign a security agreement granting a lien against the vehicle you are buying. It's the voluntarily lien that allows the lender to repossess your car if you don't pay as agreed.
Involuntary liens are security interests imposed against your property by a state or federal statute or court order. No agreement is involved. Involuntary liens include:
One of the steps that a secured creditor must take to protect its right to collect is to perfect its lien. "Perfection" is a legal term that refers to the action required to give other creditors and interested parties notice of a lien or security interest. The action to perfect a lien depends on the property type and applicable state law. For example:
In most states, the lender perfects its lien by recording (filing) mortgages and deeds of trusts in the county where the property is located.
Lenders usually can perfect liens against cars, motorcycles, and trucks by a filing with the state motor vehicle department and a notation on the certificate of title.
Security interests in most tangible personal property—like equipment, furniture, tools, goods, and materials—are perfected by filing financing statements. A financing statement is a document that identifies the borrower, lender, and collateral for a secured debt.
Unlike security agreements, financing statements don't have to be signed to be effective. A creditor can file a financing statement as long as you have signed the security agreement for the collateral that it is supposed to cover. In most states, financing statements are filed with the secretary of state.
Perfecting a lien is a critical step for any creditor. Sometimes, borrowers grant liens against the same property, like your home, to multiple creditors. Take, for example, a home equity line of credit, which is usually junior to the mortgage you took out to buy your house. A junior lien, like a home equity line of credit, can, in effect, move up in priority if the holder of the first mortgage fails to perfect its interest.
In bankruptcy, the consequences of a lender's failure to perfect a lien can be even more serious. If you file bankruptcy, the court has the power to set aside a lien that has not been properly perfected. A lien that is set aside is treated as if it never existed in the first place—meaning that the lender becomes an unsecured creditor. (To learn what happens to unsecured debt in Chapter 7 and 13 bankruptcy, see What Happens to Liens in a Chapter 7 Bankruptcy and Your Debts in Chapter 13 Bankruptcy.)
One of the big differences between an unsecured debt and a secured debt is how the creditor can enforce its rights if you fail to make payments. For most unsecured debts, creditors must first sue you in court before they can take any of your property. However, A secured creditor can move to enforce rights if you default on your loan obligations and have not filed bankruptcy. Remedies to enforce secured debts include:
Secured creditors may not trespass on private property or breach the peace, but they usually don't have to go to court before repossessing cars or other motor vehicles.
A lender may enforce a home loan by foreclosing its mortgage or deed of trust. In some states, foreclosure doesn't require any court action and may be completed within a matter of a few months. In other states, where court approval is needed, foreclosure typically takes much longer.
A secured creditor has the additional option of filing a court action to obtain a judgment against you. Depending on applicable state law, a creditor may seek a judgment for the entire obligation that you owe or the balance left after deducting the value of any collateral that it recovers.
If you’re struggling financially and want to learn about different ways to manage your debts, like negotiating settlements or filing bankruptcy, consider talking to a debt settlement lawyer or bankruptcy lawyer.
]]>An "unsecured debt" is an obligation or debt that doesn't have specific property, like your house or car, serving as collateral for payment of the debt. If you fail to pay unsecured debt, the creditor can't take any of your property without first suing you and getting a court judgment, subject to a few exceptions.
A "secured debt," on the other hand, has a piece of property serving as collateral for the debt. If you fail to make payments, the creditor can take the property.
Common types of unsecured debts include:
Most debts are unsecured. The primary exceptions are home and auto loans, which are almost always secured.
Advances on lines of credit can be unsecured claims. Some lines of credit are unsecured, backed only by your promise to repay advances taken against them. Obligations on home equity lines of credit, on the other hand, are typically secured claims (secured by your home).
If you fail make payment on an unsecured debt, the creditor can contact you to try to obtain payment, report the delinquent debt to a credit reporting agency, or file a lawsuit against you. Generally, a nongovernmental, unsecured creditor can't seize your assets without a court judgment.
To get a judgment, a creditor must file a complaint in state or federal court and serve you with a copy, which is the start of the lawsuit. You have the right to file an answer to the complaint and contest the lawsuit before a judgment can be entered.
Once a creditor obtains a court judgment against you, it can proceed with collection remedies. Collection remedies and procedures are governed primarily by state law. A judgment creditor may, among other things:
The percentage of your wages that can be garnished varies from state to state. State and federal law also exempt some real and personal property from collection. Creditors can't garnish or collect from assets to the extent exemptions cover them. Exemptions available to you might protect your home equity, household furniture, pension plans, and other items of property from your creditors' collection efforts.
If you default on a federal student loan, the Department of Education can garnish up to 15% of your disposable income without a court judgment. State and federal tax authorities may also undertake collection remedies without going to court.
If you’re struggling financially and want to learn about different ways to manage your debts, like negotiating settlements or filing bankruptcy, consider talking to a debt settlement or bankruptcy lawyer.
]]>If you don’t want to keep property serving as collateral for a secured debt when you file for bankruptcy, you can “surrender” it by giving it back to the lender. The bankruptcy case will wipe out your responsibility to pay for the secured debt. If you want to keep the loan in place—and keep the property—you'll need to continue paying the loan. One way to do so is by completing a reaffirmation agreement with the lender.
In Chapter 7 bankruptcy, you must decide how to deal with your secured debts and the property that secures those debts.
You’ll find more about options such as reaffirming the debt or redeeming the property in Secured Debt & Property in Chapter 7 Bankruptcy.
When you surrender property in Chapter 7 bankruptcy, you return it to the creditor, and it’s the simplest method of dealing with secured debt and property in Chapter 7. The bankruptcy discharge wipes out your personal liability for the secured loan. The property lien will no longer exist because the lender will have recovered the property.
If you decide to surrender an item of property in your Chapter 7 bankruptcy case, you will inform the court of your decision in your bankruptcy papers. You’ll do so by completing the Statement of Intention for Individuals Filing Under Chapter 7 form.
You don’t have to physically return the property to the creditor—the creditor must collect it. If the creditor doesn’t retrieve the property and the trustee doesn’t claim it, you keep it. The likelihood of this happening is higher when the property isn’t worth much.
Surrendering property can be a good option if:
Find out more about surrendering a car in Chapter 7 bankruptcy.
The most obvious disadvantage to surrendering property is you lose the property. Surrendering might not be an option if you need your car to go to work or attend important doctor’s appointments.
A less obvious disadvantage to surrendering property is that some courts won’t count your loan payments on property you intend to surrender for purposes of the means test. Because secured payments reduce your available disposable income for qualification purposes, you might have difficulty qualifying for Chapter 7 bankruptcy.
Learn more about the bankruptcy means test.
Bankruptcy works by severing contracts with your creditors. Because your obligation to pay a debt stems from a valid contract, a creditor can’t collect the debt without it. However, in some cases, you’ll want to continue paying a lender to keep the financed property.
For instance, suppose you’re making payments on a vehicle. If you have another form of transportation, losing the car you’re buying on credit might not be an issue. But if you need the car to get to work or to take your children to school, then losing it might not be an option.
To get around this problem, you can enter into a new contract—a reaffirmation agreement—with the holder of your auto loan. If both sides agree to the old contract terms or newly created conditions, the bank will draft a reaffirmation agreement and forward it to you for your signature. After you sign, it will be filed with the bankruptcy court.
However, taking additional steps to make the contract binding is necessary. Specifically, you must demonstrate that you can afford the monthly car payment. If represented, your lawyer can attest that the payment will not pose an undue hardship for you (and your family) by signing the reaffirmation form and filing it with the court. Otherwise, the judge will determine at a hearing.
Once the reaffirmation agreement is approved, you’ll be legally liable to pay the debt balance. As long as you remain current on your payment, you can retain the property without fear that the lender will repossess it.
Learn more in Reaffirming Secured Debt in Chapter 7 Bankruptcy.
Did you know Nolo has made the law easy for over fifty years? It’s true—and we want to ensure you find what you need. Below you’ll find more articles explaining how bankruptcy works. And don’t forget that our bankruptcy homepage is the best place to start if you have other questions!
Our Editor's Picks for You |
|
More Like This |
Should I File Chapter 7 or 13 to Keep My House? Secured Debt and Property in Chapter 7 Bankruptcy Motor Vehicle Exemption: Can You Keep Your Car in Chapter 7 Bankruptcy? |
Consider Before Filing Bankruptcy |
|
Helpful Bankruptcy Sites |
We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.
]]>When taking out a secured loan, you agree the purchased property will be collateral, creating a voluntary "lien." The lien lets the creditor recover the property if you don't pay—even if you file for Chapter 7 bankruptcy. Filers don't always lose secured property in Chapter 7, but keeping it will depend on the following:
We explain both Chapter 7 secured property approaches below and briefly cover options available in Chapter 13. However, keep in mind this article addresses voluntary liens only. You can learn about voluntary and involuntary liens in What Happens to Liens in Chapter 7 Bankruptcy?
If you’re making payments on an expensive property—such as a home, car, diamond ring, computer, or couch—you’ve likely agreed that the property will serve as collateral and the lender can sell the collateral if you don’t pay as promised. For instance, the lender might repossess a car or foreclose on a home if you fall behind on the payment.
Whether the lender must go to court before selling the property will depend on your state's laws. Also, some states will give the lender a “deficiency” judgment for the remaining balance if the sale brings less than the amount owed.
You can eliminate your responsibility to pay a mortgage, car payment, or another secured debt in Chapter 7 bankruptcy. However, filing for bankruptcy doesn’t take away a lender’s lien rights to reclaim the property. Why? Because a secured debt has two parts:
In some situations, you can ask the bankruptcy court to remove the lien as part of your bankruptcy case. For instance, the bankruptcy court might remove an involuntary property lien placed by a state court after trial if the lien interferes with a bankruptcy exemption.
If you have a debt secured by property and you file for Chapter 7 bankruptcy, here are your options, assuming you meet all requirements:
Find out more about keeping secured property in Chapter 7, including how to keep your house or protect a car.
If you’re wondering what it means to protect equity with a bankruptcy exemption or want more details about redeeming property in Chapter 7, keep reading.
If you’re behind on a secured debt payment, like a mortgage or car payment, filing for Chapter 7 bankruptcy won’t help you keep the property. Why? Because Chapter 7 doesn’t have a mechanism to catch up on payment arrearages.
If you can’t make arrangements to bring your payments current, you’ll likely lose the property after your case ends. You could lose your asset even sooner if the court lifts the automatic stay to allow for foreclosure or repossession.
Because there’s no way to force a lender to work with you in Chapter 7, if you want to keep secured property, ensure you’re current on payments and can protect all property equity before filing.
You can protect some property when you file for bankruptcy, but the amount you can keep will depend on your state’s bankruptcy exemptions. If you owe more on a secured loan than the property securing the debt is worth, you don’t have equity and can skip this step. However, suppose you can’t protect all of a property’s equity. In that case, the Chapter 7 bankruptcy trustee assigned to the case would sell it for your creditors’ benefit.
Here’s how it works.
Example. You owe $3,000 on a car worth $6,000, leaving you with $3,000 in equity. Your state’s vehicle exemption will let you protect $1,000. In this case, the trustee would sell the car and pay your secured creditor the $3,000 you owe. You'd receive the $1,000 exemption amount. The remaining $2,000 would go to unsecured creditors, minus any costs of sale and the trustee’s commission.
Yes. If you’re behind and want to keep the property, Chapter 13 bankruptcy is probably the better choice. In Chapter 13, you can make up missed payments over time using the Chapter 13 repayment plan. However, keep in mind that you'll need to be able to afford the regular monthly payment and meet other Chapter 13 payment plan requirements, too.
When you redeem property in Chapter 7 bankruptcy, you can satisfy the loan by paying the value of the property in one lump sum payment. If you and the creditor disagree about how much the property’s worth, the court will decide at a “valuation” hearing. The judge will extinguish your obligation to the creditor after you pay the agreed-upon lump sum amount.
If you're wondering how bankruptcy exemptions come into play here, the simple answer is they don't. Filers redeem property in Chapter 7 bankruptcy only when property equity doesn't exist because one of the requirements is that you owe more than the property is worth.
You can redeem property in Chapter 7 bankruptcy only if you meet all of the following conditions:
A Chapter 7 property redemption is often a good option if your debt balance exceeds the property's value. Why? Because if you redeem the property in bankruptcy, the creditor must accept the item’s value as payment in full, even if you owe significantly more.
The main drawback to redemption is most debtors can't afford to pay the property's value in a single payment. Some companies specialize in lending to people seeking to redeem property, so a loan might be an option. Or you might be able to get the money from a friend or relative.
Chapter 13 offers ways to reduce the amount owed on secured property, but bankruptcy practitioners refer to these procedures by different names. You'll use a "cramdown" to reduce what you owe on personal property, like your car. You can even use a Chapter 13 cramdown on investment real estate.
A “lien strip” is used to pay significantly less on a wholly unsecured mortgage on your residence. You'll find more information about reducing your residential home mortgage in Chapter 13 in Keep Your House in Chapter 13 Bankruptcy.
Did you know Nolo has been making the law easy for over fifty years? It’s true—and we want to ensure you find what you need. Below you’ll find more articles explaining how bankruptcy works. And don’t forget that our bankruptcy homepage is the best place to start if you have other questions!
Our Editor's Picks for You |
|
More Like This |
Tax Debts in Chapter 7 Bankruptcy |
Consider Before Filing Bankruptcy |
How Bankruptcy Exemptions Protect Your Property |
Helpful Bankruptcy Sites |
We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.
]]>The reaffirmation process lets you remain responsible for a debt, such as a car payment, and keep the car or other “collateral” property securing the debt. You and the lender enter into a new contract—usually on the same terms—and submit it to the bankruptcy court.
Before entering into a reaffirmation agreement, it helps if you’re current on the loan payments, but some lenders will negotiate new terms with you. However, a lender isn’t required to do so, so it’s best to be current before filing for Chapter 7.
Also, you must meet another requirement. You must be able to protect all of the equity in the property with a bankruptcy exemption. If you can’t exempt all of the property’s equity, the trustee will sell the asset and use the proceeds to pay your unsecured creditors.
When you reaffirm a debt, you agree that you will still owe it after your bankruptcy case ends. Both the creditor’s lien on the collateral (which gives the creditor the right to take the property if you fail to pay as agreed) and your liability to pay the debt will survive bankruptcy intact.
In most cases, it will be as if you never filed for bankruptcy for that debt.
Reaffirmation provides a sure way to keep collateral as long as you abide by the terms of the reaffirmation agreement and keep up your payments. If you stay current on the payment, the lender won’t be able to take back the property.
Reaffirmation also provides an opportunity to negotiate new terms to reduce your payments, your interest rate, or the total amount you will have to pay over time. However, the lender doesn't have to agree to new terms and most reaffirmation agreements are on the original contract terms.
Because reaffirmation leaves you personally liable for the debt, you can’t walk away from the debt after bankruptcy. You’ll still be legally bound to pay the deficiency balance even if the property is damaged or destroyed. And because you have to wait eight years before filing another Chapter 7 bankruptcy case, you’ll be stuck with that debt for a long time.
For instance, if you reaffirm your car note and then default on your payments after bankruptcy, the creditor can (and probably will) repossess the car, auction it off, and bill you for the difference between what you owe and what the trustee received at auction.
Example 1. Suppose you owe $25,000 on your car before filing for Chapter 7 bankruptcy. You most likely will continue to owe $25,000 on your car after you file for bankruptcy (unless you negotiate a lower amount in your reaffirmation agreement). If you can’t keep up your payments and the car is repossessed, you’ll owe the difference between the $25,000 reaffirmation amount and the amount the lender sells the car for at auction, or “deficiency balance,” which will be considerably less than you owe, in most cases). Nearly all states permit a creditor to sue for a deficiency balance. However, about half of the states don’t allow deficiency balances on repossessed personal property if the original purchase price was less than a few thousand dollars.
Example 2. Tasha owes $1,500 on a computer worth $900 and reaffirms the debt for the full $1,500. Two months after bankruptcy, she spills a soft drink ruining the computer. Because she reaffirmed the obligation, she still must pay the creditor the remaining balance.
The first step is ensuring the Chapter 7 bankruptcy trustee won’t sell your property. If you can’t protect all of the equity with a bankruptcy exemption, the trustee will sell it, pay the lender, give you the exemption amount, and use the remaining proceeds to pay unsecured creditors.
However, if you can protect all of the property equity, you can use a reaffirmation agreement and continue paying on “secured” property that’s encumbered by a lien. You and the creditor must agree to any change in terms.
Also, you or the lender must file the agreement in court as part of the bankruptcy case. The bankruptcy court must review the agreement in a reaffirmation hearing if an attorney does not represent you. If you have a lawyer, the lawyer must sign the agreement and attest that you can afford the payment and that it won’t cause undue financial hardship.
At the hearing, the judge will consider how the reaffirmation might affect your post-bankruptcy budget and whether you can afford the payments. The judge can reject the agreement if it isn't in your best interest or would create an undue hardship for you or your family.
Reaffirmation agreement rejections occur when it appears that you can't afford the payments after paying your basic living expenses or if you owe much more on the debt than the property is worth. The bankruptcy judge will make this determination after reviewing the income and expense forms filed with the bankruptcy petition in your case.
Sometimes a lender will let you keep a car or other property without filing a reaffirmation agreement as long as you continue making your payment. This is a good way to go because if the lender repossesses the property because you can't make your payments, or you let the car go back to the lender after an accident, you won't be responsible for paying anything further.
That won't be the case if you enter into a reaffirmation agreement. Because reaffirming a debt comes with the disadvantage of leaving you in debt after your bankruptcy case ends, you should consider it only if:
Reaffirmation might be the only practical way to keep some property types, such as automobiles or your home. Also, reaffirmation can be a sensible way to keep property that is worth significantly more than what you owe on it.
If you decide to reaffirm a debt, it’s usually worth asking the creditor to accept less than you owe as full payment. For most people, it’s not a good idea to reaffirm a debt for more than what it would cost you to replace the property.
Learn more in Your Home in Chapter 7 Bankruptcy and Your Car in Chapter 7 Bankruptcy.
If you need the collateral, you’ll want to be current on your payments before filing for bankruptcy to stay on the creditor’s good side. If you fall behind, the creditor can demand that you bring your account current before agreeing to a reaffirmation contract.
It’s common to wonder how secured and unsecured debts differ. The answer is simpler than you might think.
When applying for a credit account or taking out a loan, the lender might ask you to put up collateral (valuable property) that it can sell if you fail to pay your bill—especially when borrowing a large sum of money. The collateral assures or guarantees the lender that it will get paid if you stop making your payment as agreed.
Securing a loan with collateral creates a “lien” on the property, a type of ownership interest that remains until the borrower pays off the debt. The lien interest gives a creditor the right to repossess your vehicle if you fail to make your payment. Likewise, if you fall behind on your mortgage, the lien will allow the lender to foreclose on your home.
A bank or creditor who owns a collateralized debt has what is called a “secured debt.” If the bank seeks reimbursement in a bankruptcy case, it will file a “secured claim.” If the bankruptcy trustee sells the property, the trustee must pay the secured lender first before distributing funds to unsecured creditors.
However, 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.
Credit cards, medical bills, and personal loans, such as payday loans are all examples of unsecured debt. An unsecured creditor can gain a security interest by winning a debt collection lawsuit and recording the money judgment with the local recorder’s office or the appropriate state agency.
If you want to keep your car, home, or other property in Chapter 7, a reaffirmation agreement might be the way to go. But it might not be in your best interests. A local bankruptcy lawyer can explain your options and help you make the right decision for you.
Learn more about why you should hire a bankruptcy lawyer and options if you can't afford a bankruptcy lawyer.
Did you know Nolo has been making the law easy for over fifty years? It’s true—and we want to make sure you find what you need. Below you’ll find more articles explaining how bankruptcy works. And don’t forget that our bankruptcy homepage is the best place to start if you have other questions!
Our Editor's Picks for You |
|
More Like This |
What Happens to Liens in Chapter 7 Bankruptcy? Motor Vehicle Exemption: Can I Keep My Car in Chapter 7 Bankruptcy? |
Consider Before Filing for Bankruptcy |
How to File for Bankruptcy in Your State Preparing for Bankruptcy: What to Do With Bank Accounts, Automatic Payments, and Utility Accounts |
Helpful Bankruptcy Sites |
We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.
]]>Read on to learn about secured property and debts in Chapter 7 bankruptcy, why you might want to redeem property, restrictions on property you can redeem, and the advantages and disadvantages of redemption.
When you make a large credit purchase, such as for a car, jewelry, computer, or furniture, the lender usually requires you to put up the purchased property as collateral. This type of debt is known as a secured debt because if you fail to pay, the lender can take back the property, sell it at auction, and use the proceeds to pay down the loan.
In Chapter 7 bankruptcy, when you fill out the official bankruptcy forms, you must tell the court and your creditor what you intend to do with the property securing a debt. For instance, your options include:
If you aren’t current on your payments, you’ll probably lose the property because Chapter 7 bankruptcy doesn’t provide a way to catch up on arrearages. So unless the lender agrees to negotiate a new agreement (perhaps through a reaffirmation agreement), the lender will be free to pick up the property after your case ends—or sooner if the lender successfully lifts the automatic stay—the order that prevents collection activity.
If you surrender the property, you won’t need to worry about paying any portion of the debt. It will get wiped out in your bankruptcy case.
When you redeem property in Chapter 7 bankruptcy, you buy it back from the creditor in one lump sum for the value of the property. If you and the creditor don’t agree on what the value of the property should be, the court will hold a “valuation” hearing and decide the question for you.
If you choose to redeem property and the court approves the redemption, once you pay the creditor the lump sum amount, you own it free and clear.
You can redeem property in Chapter 7 bankruptcy only if you meet all of the following conditions:
Redemption is often a good option if your debt balance is substantially greater than the value of the property. If you redeem the property, the creditor must accept the item’s value as payment in full, even if you owe much more on the debt.
The main drawback to redemption is coming up with the money. It must be in one lump sum payment. Some companies specialize in lending to people seeking to redeem property; so a loan may be one way to get some cash fast. Or you might be able to get the money from a friend or relative.
]]>