A debt is secured if the creditor has collateral. Home mortgages and car loans are probably the most common kinds of secured debts. The collateral is either your home or your car. If you don’t pay the debt, the lender can foreclose or repossess the collateral ,i.e., take your house or car (presumably you already knew this). That’s not the end of it. After foreclosure or repossession, the creditor usually sells the collateral to the highest bidder, often at a public auction, and sends you a bill for a “deficiency," that is, the amount (if any) by which the sales price on disposition falls short of the payoff amount of the loan. (Of course, if the auction leaves a surplus, the lender owes you money. But don’t count on it.)
A secured lender’s lien passes through a Chapter 7 bankruptcy unaffected, as if nothing ever happened, but your personal obligation to pay the debt will generally be discharged, assuming, e.g., no misconduct on your part. Thus, the lender can still repossess or foreclose if you don’t keep up the payments, but they can’t demand that you pay any deficiency. While your case is pending in the bankruptcy court, however, they can’t repossess or foreclose unless they get permission from the Bankruptcy Court by filing a motion for relief from stay. Once the case is closed, however, they are generally free to repossess or foreclose as long as they comply with state law. Chapter 7 gives you three ways to deal with secured creditors. You can:
- Surrender the collateral in full satisfaction of the debt, and that’s the end of the relationship. You’ll never hear from them again.
- Redeem the collateral by paying the lender, in a lump sum, the current value of the collateral (instead of the full balance of the debt).
- Reaffirm the original debt and formally agree in writing, to continue paying it with interest in installments. Reaffirmation means giving up the right to discharge your personal obligation, and that’s usually a bad idea. Therefore, the Bankruptcy Code puts several hurdles in the way to discourage reaffirmation. One of the hurdles is that you and your attorney may have to appear in court for a hearing to determine whether you can really afford to pay the debt you want to reaffirm, no matter how badly you think you need to retain the collateral.
In many cases, because the secured creditor really doesn’t want the car or other collateral (they would much rather have Mr. Green, and the finance charge), they will acquiesce in your keeping the car by simply continuing to make the regular payments as they become due, without electing one of the three choices provided by the Bankruptcy Code. If you choose this course, make sure your future payments are always made on time – not one day late. And, if the auto lender happens to reject a payment, look out! You should discuss this issue with your bankruptcy attorney before deciding to reaffirm a car loan or any debt in bankruptcy. There’s usually a better way.
A secured lender’s lien likewise rides through a Chapter 13 bankruptcy – at least until discharge. If you want to keep the collateral, you must do one of two things: either (a) pay the secured debt in full through the plan, or pay, in installments, an amount equal to the value of the collateral, if less (cram down); or (b) if it’s a long-term debt, your house note or a mobile home loan and some long car loans, cure the arrears by making payments through your plan that will catch you up by the end of the plan. There are two other important fine points about secured debts in Chapter 13:
- You can surrender the collateral in full satisfaction of the debt, including any deficiency claim. There are two exceptions that apply in Chapter 13. One exception is a purchase-money loan for a car you bought within 910 days before the bankruptcy filing (the 910-day car). For this kind of loan, you will still owe the full amount of the loan as an unsecured debt even after surrendering the car. There is a similar exception for purchase-money loans for something beside a car that you bought within a year before the filing of the bankruptcy.
- You can modify the terms of a secured loan by, for example, reducing the interest rate or extending the payment period (up to five years). In Chapter 13, however, you cannot modify the terms of the mortgage on your primary residence, unless your home includes income units or unless the lender has other security for the loan, or the last payment under the loan agreement is due before the end of the plan.
If you have questions about secured debts, contact Lee Ringler Law Offices today. We proudly serve clients throughout the greater Augusta area and CSRA, including Evans, Martinez, and Grovetown, GA, North Augusta and Aiken, SC, and surrounding counties.