Chapter
7 Bankruptcy Secured & Unsecured Debt – Secured & Unsecured Creditors
If you are thinking
about filing for bankruptcy, you need to list all your debts. And you need to
describe your debts.
How do you describe
debts? Debts are defined by:
·
How
you either borrowed the money; or
·
How
you bought and paid for a product; or
·
How you agreed to pay for a service.
Examples:
Home
Purchase: John
buys a house using a mortgage from
Acme Bank. The deal between John and Acme Bank allows John to buy the house
over time, but Acme Bank has a documented financial lien (interest) against the
house until John pays off the debt. The home purchase is a secured debt. The
mortgage is a loan which is secured by John’s house.
Car
Purchase: Suzy
needs a new car, but needs a loan to buy one. Acme Bank agrees to loan Suzy the
money in exchange for a secured interest in the car. The car loan is a secured
debt. The loan is secured by Suzy’s car.
Credit
Card: Milo wants a
credit card for emergency purchases when he does not have enough cash to buy
something outright. Acme Bank offers $5,000 in credit to Milo. In exchange Milo
will make regular monthly payments including a fixed interest amount to Acme
Bank. Milo buys lots of things with his new credit card. Milo gets a new
scooter, bedroom set, clothes and other stuff. Acme Bank does not have a secured interest in
any of the things Milo bought with his credit card.
Emergency
Room Bill: Jane is
in a bad car accident and goes to the hospital. Even with insurance Jane has to
pay over $5,000 for her health services. The hospital sends Jane a bill. If
Jane doesn’t pay the bill, the hospital will have to sue Jane to get the money.
The hospital does not have a
secured interest in any real or personal property Jane owns so the hospital
debt is unsecured debt.
So a secured debt is
secured by something the debtor owns, and the debtor has personal liability to
pay the debt. If you stop paying on a secured debt, the creditor can seize the
property used to secure the loan. Common things used to secure a loan are a
home, a car, appliances and electronics.
But an unsecured debt
is not secured by any property of the debtor.
What’s
the Difference between a Secured Creditor and an Unsecured Creditor in Bankruptcy?
Bankruptcy rules give
secured creditors special treatment over unsecured creditors.
Secured
Debts in a Chapter 7 Bankruptcy
In a Chapter 7
Bankruptcy a debtor can liquidate or wipe away debts to get a fresh start. But
if the debtor has a secured car loan, the creditor can seize it.
Chapter
7 Debtors who are Current on Secured Debt Payments
Many times a debtor is
current on the payments for a secured debt such as a car loan, and he/she needs
to keep the car to get to work. If the debtor wants to keep the property, there
are a few options:
Reaffirmation: You work with the secured creditor
so you can keep the property. But if you fail to make the required payments,
the creditor can take the property. Most importantly, you have to get the
creditor to agree to reaffirmation.
Redemption: You buy the property from the
creditor for a lump sum during the bankruptcy process. Unfortunately, very few
debtors have enough cash to use the redemption option.
Surrender: You can give up the property which
secures the debt and wipe out the debt during the bankruptcy process. Without bankruptcy, surrendering the property
to the creditor does not wipe out the debt, and a debtor could surrender the
property but still wind up liable to the creditor for a deficiency
judgment. However, in a Chapter 7
bankruptcy, surrendering the item which secures the debt, be it a house, car etc.,
along with the protections of bankruptcy law prevents the creditor from
pursuing the debtor for any loan deficiency.
Chapter
7 Debtors who are Not Current on Secured Debt Payments
A debtor who cannot
make his/her car payments will have a hard time saving the car. The secured
creditor cannot repossess the car while the bankruptcy stay (a time period
where creditors cannot try to collect) is in effect. Most secured creditors
will ask the court to lift the stay to seize the property. In this common
scenario courts will lift the stay and allow the secured creditor to repossess the item unless the debtor has reaffirmed,
redeemed or surrendered the item which secures the loan as described above.
Unsecured
Debts in a Chapter 7
Bankruptcy rules
don’t give any special treatment to most unsecured creditors. Some types of
unsecured creditors include medical creditors and credit card companies. In
many Chapter 7 Bankruptcies unsecured creditors get little or nothing in the
bankruptcy process.
Chapter
7 Priority Unsecured Debts
Some unsecured debts
have to be repaid in full such as Alimony, Child Support, Taxes, and others
listed in the Bankruptcy Code.
If you are
considering bankruptcy call Schwent Law at (636) 937-4994.