There are several overriding concerns for most debtors when they consider bankruptcy, and the primary one is whether in bankruptcy secured debts will remain, be liquidated, or be foreclosed upon. Secured debts usually consist of a mortgage secured by a home or a car loan secured by a vehicle. If the debt is discharged in bankruptcy, will the homeowner lose their property or the debtor their car? In chapter 7 bankruptcy, that is a possibility that that will happen; but there may be ways to avoid it.
Discharging Secured Debts
There are generally two ways to discharge debts in a bankruptcy:
- In Chapter 7, through a general discharge after all reasonable payments are made and liquidation of personal property occurs
- In Chapter 13, after a repayment plan has been instituted and it either fails, or is completed with some remaining debt.
There is, however, more involved in processing either form of bankruptcy, requiring careful consideration, and legal advice.
Chapter 7 Bankruptcy
Also known as liquidation, more debtors have difficulty qualifying for chapter 7. If they are eligible,
- They receive an automatic stay while they work out the details of paying and discharging their debts.
- The bankruptcy trustee determines what, if any, property must be liquidated. If the debtor has little property, or if the equity in the property they do have falls below the exempt limit, they will not be required to liquidate it.
- Unsecured debts that cannot be paid from the debtor’s assets are generally discharged, or erased.
- Secured debts may also be discharged, but when a lender holds a lien on the house or car, they have the right to foreclose or repossess the property if the loan is in default.
- If the debtor can continue to make their regular payments after a chapter 7 bankruptcy, they will be able to keep their property.
A lender is more interested in receiving regular loan payments than in stockpiling property. In fact, in a weak economy lenders may have more property on their hands than they can dispose of successfully. It is to their advantage to either renegotiate a loan with lower payments, or continue to receive regular payments at the original rate than to foreclose, assuming they believe the debtor will be consistent and reliable.
Getting Legal Help with Secured Debts
Every bankruptcy petition is different, and creditors are justified in having doubts about whether a debtor who has already missed payments or made partial payments will be able to get back on track. However, an effective bankruptcy attorney can help a debtor present their case well, assess their situation and guide them to wise decisions, and help them realize the greatest benefits possible from a chapter 7 bankruptcy.
