At our firm, we understand that two top concerns for many people considering bankruptcy are (1) keeping their possessions and (2) obtaining peace from worry over debt collection. For most individuals, there are bankruptcy options to keep most types of property.
A secured debt or secured claim is one where the lender has some sort of collateral. A car loan or home mortgage would be the most common examples, but other debts may be secured as well, especially in business settings.
Frequently Asked Questions
Our frequently asked questions also address Secured Debt:
Many debtors are able to keep their cars in bankruptcy. The basic strategies for keeping an automobile depend primarily on the value of the car, the existence and amount of a car loan, and the bankruptcy chapter chosen. Please contact our bankruptcy attorney to discuss the particulars of your situation.
Sometimes, a financing company will ask a borrower to sign papers pledging various household property (such as furniture, televisions, and appliances) as collateral to secure a new loan. Done properly, the creditor then has a legal right to demand turnover of the existing household property if the loan goes unpaid.
Bankruptcy is designed to provide relief from debts. However, all debts are treated the same. While what might happen to any given debt can become a very fact-particular inquiry, there's a few categorizations that are very basic to understanding the bankruptcy process.
910 days (about two and a half years) is an important threshold in the life of a car loan for a prospective filer of chapter 13 bankruptcy.
Like other secured loans, a car loan can become underwater or undersecured, where the value of the car is less than the amount owed on the loan. This most often happens when cars are purchased new and depreciate faster than the loan balance is repaid. It also occurs when loans have high interest rates or when the car loses value unusually fast, as is the case of high mileage or an unpopular make and model.
Generally, no. If a person desires to keep a car, generally it will be necessary to keep making the payments. Self-help repossession can occur very quickly, and very soon after a default (missed payment) on the loan contract.
We have discussed Secured Debt in the following posts on our bankruptcy blog:
More than one creditor might have a claim to a security interest in collateral, especially valuable collateral. The most common example is a second mortgage or a home equity line of credit, when the homeowner has pledged the house as collateral, despite the fact a first mortgage exists. Just as the idea with one-lien collateral is that sale of the collateral provides an alternative source of payment for a loan, when there are multiple liens the idea is the sale of the collateral could in theory pay all of the loans. How does the law decide which creditor has greater rights? The law of secured transactions handles this with the concept of priority.
Many chapter 13 bankruptcy plans take over payments on debts that the debtor beforehand was paying directly. Mortgage payments and car payments are the most common examples. Therefore, there is a transition between the last direct payment to the lender and the filing of the case and commencement of payments to the chapter 13 trustee. Careful timing of this transition can make coming up with the cash for the first month's chapter 13 payment more manageable.
When I meet with an individual considering bankruptcy who has one or more car loans, I ask a number of questions. These questions provide an essential outline of car loans in bankruptcy.
One common use of chapter 13 bankruptcy is prevent foreclosure of a home. Chapter 13 allows the owner/borrower to bring the loan current over a period of years and keep his or her house. When does one invoke the power of chapter 13 to prevent foreclosure?
Here in North Carolina, a car is typically essential transportation. Owning a car can be vital to continued employment. Lenders and car lots know this, and are very willing to loan money to buy a car. The catch, however, is a high, sometimes very high, interest rate. A high interest rate strains a household budget, and can prolong the debt burden beyond the serviceable life of the car. Bankruptcy offers tools for consumers to get out from the burden of crushing auto loan interest.
A secured loan is any loan where the lender has an interest in collateral they could potentially take to pay the debt, including mortgages, deeds of trust, liens, and car loans. For bankruptcy debtors with secured debt, they can choose to file chapter 7 or chapter 13. Chapter 13 may offer options to adjust the terms on which the secured loan is repaid. Chapter 7 debtors who keep secured property generally pay the secured loan on the same terms as before bankruptcy. In both chapters, turning the property over to the creditor is also an option. This post discusses how and in what circumstances chapter 13 can alter secured loans.
For chapter 7 debtors, statutory means testing applies to individuals above the state median income. The availability of means testing deductions determines the result of the statutory formula, and whether a given debtor can proceed in chapter 7. One means test deduction is for payments on secured debts due in the next 60 months. By this deduction, if a debtor has an expensive mortgage payment, that payment is accounted for in determining if any monthly income is available for unsecured creditors.
Consumer secured lending is a commonplace part of many household budgets. Major purchases like homes and cars are almost always financed, while other consumer transactions, like the purchases of furniture, electronics, appliances, and HVAC equipment are sometimes financed. A lender will often seek to retain rights in collateral as additional assurance that the loan will be paid. Sometimes, a consumer will pledge property they already own as collateral to a new loan, such as a home equity line of credit. In the legal lingo, these are all "secured transactions" aiming to create secured debts.