What is Secured Debt in Bankruptcy?

The decision to file bankruptcy is one of the most important choices you can make in your life. Bankruptcy can be extremely helpful and may help you get out of a serious financial problem. However, you should understand how debt is taken care of with bankruptcy to ensure that you will benefit from it. When you file Chapter 7 bankruptcy, you will need to liquidate your assets in order to repay most or all of your debt and start anew. There are two types of debt you need to be aware of – secured debt and unsecured debt.

Definition of Secured Debt

A secured debt is a loan that you guarantee with collateral. Collateral is an asset of value that will serve to secure the debt. If you fail to repay the loan, the lender may take possession of the asset that you used for collateral. For example, when you obtain a mortgage, your home itself is the collateral. If you default on your mortgage, the bank may foreclose on the home and take possession of it. Other examples of secured debt are home equity loans and car loans, among others.

What Happens to Secured Debt in Chapter 7 Bankruptcy?

When you secure a loan, you sign an agreement, which is a contract. Therefore, you have a legal obligation to pay what you owe. The lender has the right to recover property through a lien. If you have secured debt, you have several options in Chapter 7 bankruptcy. You may choose to surrender the property to the bank and discharge the debt. Another option is to continue making payments and retain the property. This option is called reaffirming the debt. The third option is to redeem the property by paying a lump sum equal to the current market value. Redemption has limited use.

Can I Keep Secured Debt in Chapter 7 Bankruptcy?

Generally, Chapter 7 bankruptcy requires you to liquidate your assets. If you are behind on your secured debt payments, you will likely have no option to retain your property. That is because there is no way in Chapter 7 to pay money owed in arrears. There is a way to protect some of your assets using a bankruptcy exemption. You must have equity in the property to qualify for an exemption. Florida has a homestead exemption as well as personal property exemptions, including a motor vehicle exemption.

What if I Do Not Have Equity in the Property?

In some cases, you may be “upside down” with your loan. This means that you owe more than the property is worth. This can happen, for example, if you have a large home loan that is more than the current market value. In this case, you may be able to redeem the property. The court will have a hearing to determine the current value. You may be able to eliminate the debt once you make a lump-sum payment in an agreed-upon amount to the debtor. There are some restrictions on bankruptcy redemption.

If you are considering bankruptcy, you will want to keep as much of your property as possible. Bankruptcy can be complicated, but you can get the legal guidance you need from a skilled attorney. Call us today at Adam Law Group at (904) 822-7988 to request a consultation to discuss your bankruptcy options.