Examples of Secured Debt in Bankruptcy

Secured debt is debt that is backed by collateral, which gives the lender the right to take possession of the asset if the borrower defaults on the loan. In the context of bankruptcy, secured debts are treated differently from unsecured debts. Here are some common examples of secured debt that you might encounter in a bankruptcy case:

1. Mortgage Loans
   • Description: Mortgages are loans used to purchase real estate, with the property itself serving as collateral. If you fail to make your mortgage payments, the lender can foreclose on the property.
   • Bankruptcy Treatment: In Chapter 7 bankruptcy, you can either reaffirm the debt and continue making payments, redeem the property by paying the current value in a lump sum, or surrender the property. In Chapter 13 bankruptcy, you can include mortgage arrears in your repayment plan to avoid foreclosure and keep your home.
2. Auto Loans
   • Description: Auto loans are used to finance the purchase of a vehicle, with the car serving as collateral. If you default on an auto loan, the lender can repossess the vehicle.
   • Bankruptcy Treatment: In Chapter 7, similar to mortgages, you can reaffirm the loan, redeem the vehicle, or surrender it. In Chapter 13, you can pay off the loan through the repayment plan, which might allow for a reduction in the interest rate or the loan balance under certain conditions.
3. Home Equity Loans and Lines of Credit (HELOCs)
   • Description: These loans are secured by the equity in your home. If you default, the lender can initiate foreclosure proceedings to recover the debt.
   • Bankruptcy Treatment: Home equity loans are treated similarly to primary mortgages in bankruptcy. You may include them in your Chapter 13 repayment plan to manage arrears, or in Chapter 7, you may need to reaffirm or discharge the debt and potentially lose the property if you cannot make payments.
4. Secured Personal Loans
   • Description: Personal loans can sometimes be secured by collateral such as savings accounts, certificates of deposit, or personal property like jewelry or electronics.
   • Bankruptcy Treatment: These loans must be handled by either reaffirming the debt, redeeming the collateral, or surrendering the collateral in a Chapter 7 bankruptcy. In Chapter 13, they can be included in the repayment plan.
5. Business Loans
   • Description: Business loans can be secured by business assets, including inventory, equipment, or real estate. If the business defaults, the lender can seize these assets.
   • Bankruptcy Treatment: In bankruptcy, business loans secured by business assets are treated based on whether the business continues operating or is liquidated. Chapter 7 may involve liquidating business assets to pay creditors, while Chapter 13 or Chapter 11 (for businesses) can include restructuring the debt.

Treatment of Secured Debt in Bankruptcy

1. Chapter 7 Bankruptcy
   • Reaffirmation: You agree to continue paying the debt despite the bankruptcy, keeping the collateral.
   • Redemption: You pay the current market value of the collateral in a lump sum to keep it.
   • Surrender: You give up the collateral to the lender, and the debt is discharged.
2. Chapter 13 Bankruptcy
   • Repayment Plan: Secured debts can be included in the repayment plan. This allows you to catch up on arrears over three to five years, potentially with adjusted terms.
   • Cramdown: In some cases, you can reduce the principal balance of the loan to the collateral’s current market value and pay this reduced amount over the plan period (typically available for non-mortgage loans on properties).

Understanding how secured debts are handled in bankruptcy is crucial for managing your financial recovery effectively. If you’re considering bankruptcy, consulting with a qualified bankruptcy attorney can provide guidance tailored to your specific situation and help you navigate the complexities of secured and unsecured debts.