HAVE QUESTIONS?

1-281-DIVORCE (348-6723)

Secured debt bankruptcy

Dealing with Secured Debts in Chapter 7 Bankruptcy: Options for Creditors and Debtors

For over 25 years, I represented debtors, filing over 4,000 consumer bankruptcies under Chapter 7 and Chapter 13. Now, my practice focuses on helping creditors get what they are rightfully owed from Texas debtors. Understanding how secured debts are treated in Chapter 7 bankruptcy is crucial for both debtors and creditors. This article explores what happens to secured debts and the property tied to those debts in bankruptcy, as well as options for creditors to recover the debt.


What are Secured Debts in Bankruptcy?

Secured debts are those where the borrower pledges property as collateral for the loan. Common examples include auto loans, mortgages, and personal loans with specific assets tied to them. In Chapter 7 bankruptcy, these debts are treated differently from unsecured debts. While the personal liability for the debt may be discharged, the lien (legal claim) attached to the property typically remains in place.

This means that if a debtor defaults on payments, the creditor may still have the right to repossess or foreclose on the property, even if the debt itself is discharged. For creditors, this can create challenges, but there are legal avenues to ensure their interests are protected.


Options for Debtors: Surrender, Reaffirm, or Redeem Property

For debtors, there are several options when dealing with secured debts during Chapter 7 bankruptcy:

  1. Surrender the Property and Discharge the Debt:
    A debtor may choose to walk away from the property by surrendering it to the creditor. This allows the debtor to discharge the underlying debt and eliminate any obligation to the creditor. This option is often used when the debtor does not want to keep the property and has no equity in it.
  2. Reaffirm the Debt:
    If a debtor wants to keep the property, they can reaffirm the debt. This means that they agree to continue making payments on the loan, even after the bankruptcy discharge. Reaffirmation is only possible if the debtor has enough equity in the property, and that equity is protected by applicable exemptions.
  3. Redeem the Property:
    A debtor can redeem property by paying the creditor the fair market value of the property (instead of the full amount owed on the loan). This option is available if the debtor has enough funds to pay the creditor the value of the property, not the amount owed.

Understanding Equity and Exemptions

Equity is the difference between the value of the property and the amount owed on the secured loan. For example, if a debtor owes $3,000 on a car loan but the car is worth $6,000, the debtor has $3,000 in equity. In Chapter 7 bankruptcy, this equity becomes part of the bankruptcy estate, and the trustee may seize and sell the property unless it is protected by a bankruptcy exemption.

If the debtor has no equity or if their equity is fully exempt, the creditor typically cannot claim the property through the bankruptcy. In these cases, the debtor can either surrender the property or choose to reaffirm or redeem the loan.


What Happens If You’re Behind on Payments?

If the debtor is behind on payments for the secured loan, Chapter 7 bankruptcy may not prevent the creditor from repossessing the property. While the automatic stay temporarily halts repossession actions, the creditor can ask the court to lift the stay. Once the stay is lifted, the creditor can proceed with repossession.

If the debtor wishes to keep the property, they must either get current on the loan or attempt to reinstate the loan outside of bankruptcy. If the loan has already been accelerated (where the entire loan balance becomes due immediately), the debtor may need to file for Chapter 13 bankruptcy to make up the missed payments over time.


What Does This Mean for Creditors?

For creditors, Chapter 7 bankruptcy can be a complicated process when dealing with secured debts. However, creditors have legal options to recover the value of the property or enforce the lien on the collateral. By understanding the various options available to debtors and ensuring that liens are properly maintained, creditors can better protect their interests in bankruptcy proceedings.

As someone with extensive experience in consumer bankruptcy, I now represent creditors seeking to recover debts in Texas. If you’re a creditor dealing with debtors in bankruptcy, it’s crucial to consult with an attorney who understands the nuances of bankruptcy law and can help you navigate the process.

Share this post

Related Posts

Michael Busby is a Houston divorce lawyer who has been in practice for over 20 years and appears daily in the Family Law Courts of Harris County and Fort Bend County Texas

Busby & Associates , have two Houston Offices, one in Chinatown, Houston Texas and another in Independent Heights, Houston, Texas. Michael Busby is Board Certified in Family law by the Texas Board of Legal Specialization.