If you are making payments on property, the property may serve as security for repayment of the debt. If you default on your payments, the lender can repossess and obtain a deficiency judgment through the court for the difference of what you owe and what the property sold for. Debts secured by collateral are called Secured Debts. The first part of a secured debt is you have personal obligation to repay the debt just like any other debt. You are responsible to pay the debt to the creditor. Chapter 7 bankruptcy can wipe out this debt if the debt is dischargeable. If the debt is eliminated, the creditor cannot sue you or pursue to collect any deficiency. The second part of a secured debt is the creditor’s lawful claim or lien on the property that serves as collateral. A lien gives the creditor the right to repossess property and force its sale if you do not pay the debt.
Liens are not affected by a bankruptcy discharge and by failing to remain current on payments; you can lose the secured property, even if the debt is discharged.
If You Are Current on your Payments for a secured debt
You can surrender the property and walk away from the contract free and clear or keep the property by: Reaffirming the debt.
Reaffirming Debt When you reaffirm a debt, you agree you still owe the debt after your bankruptcy case is completed. The lien on the property and your personal liability for the debt will remain under the original terms with the creditor. Reaffirmation can be used with any type of property or lien, however the creditor must agree to the terms if they are different from the original agreement.
Redeeming Debt You may keep the property by “Redeeming” it assuming your property is protected by an appropriate exemption. Redemption is often a good choice if the property is valued much less than the balance on the loan. Redemption can save thousands of dollars by repaying the replacement value of the property, regardless of what you may still owe. Although redemption is mostly used to keep automobiles, you can also use it to keep household items you have financed. If you and the creditor are in conflict and disagree on the replacement value of the property, the court will schedule a hearing to determine the value of the property. A good reason to redeem property is that it will be difficult to purchase new property on credit for a few years after your bankruptcy. If the property is essential like a car you may want to consider redeeming it.
Redemption AdvantagesYou can keep exempt property. You only have to pay the replacement value of your property, regardless of what you owe. The creditor cannot object as long as you are paying the replacement value of the property. You may not have to pay the replacement value in one lump sum if you can get a redemption loan.
Stopping repossession activityAfter filing for bankruptcy the automatic stay can stop a creditor's repossession activity. However, the creditor can ask the court to lift the automatic stay. If you are behind on your payments, most courts will lift the stay in order to let the creditor proceed with repossession. If you want to keep the property and you are in a chapter 7, you will need to reestablish the loan outside of bankruptcy, by making up missed payments including fees associated and also resuming your regular payments schedule. If your lender has declared the entire balance due and will not let you reinstate it, you can file for Chapter 13 bankruptcy. You can make up the missed payments in your Chapter 13 plan. You also may be able to reduce the total amount of your payments to the property’s actual value.
Unsecured DebtUnsecured debt is a debt not secured by collateral such as credit cards and medical bills. Unsecured creditors cannot take any property to satisfy their debts. Instead, they usually have to file a lawsuit and win before they can initiate collection proceedings against a debtor.