In this, our fifth blog entry on consumer bankruptcy law, we will go more in-depth into debt distinctions in bankruptcy. Excluding taxes and certain priority claims, there are two major classifications of debt in bankruptcy: secured and unsecured. Secured claims are debts that are tied to collateral – mortgages and cars loans are the major items on this list. The second type is unsecured debt which includes credit cards, medical bills, personal loans etc. Unsecured debt is what gets discharged in a bankruptcy proceeding, so what happens to secured debt?
Secured and Unsecured Debt
Secured debt survives the bankruptcy proceeding according to law, so what does that mean for debtors? It means that in order to maintain the items that are secured (generally homes and cars), the debtor must continue to make monthly payments on the collateral in order to keep it. So how does that work in a bankruptcy? In both a Chapter 7 and Chapter 13 case, the debtor will indicate to the court in the paperwork filing whether or not they wish to retain the collateral or choose to surrender it back to the lien holder. If they wish to surrender, then the debtor in the bankruptcy is forgiven any deficiency between the resell value and the amount that was owed.
If they wish to keep the collateral they will inform the court that they wish to retain the loan or mortgage, along with the item, and continue to make the contractual monthly payments. The requirement to continue paying is sadly an issue many debtors either forget, or accidentally fail to take care of, for a few reasons. For one thing, some debtors do not realize they have to maintain their monthly bills. Also, debtors often will find that automatic payments are suspended by their banks and are required to mail in a check. Finally, some debtors sometimes don’t realize that their secured debts were not discharged and fail to make payments.
Do Creditors Care if You Surrender or Retain the Collateral?
Generally speaking they do not. However, there are exceptions. Creditors can try to object to discharge or confirmation though such objections are rare. If a creditor is concerned about anything over a secured lien it’s generally only whether the debtor is maintaining proper insurance on the home/car. If the debtor is behind on a mortgage before a chapter 7 bankruptcy and wants to keep the property, the attorney will either advise them to wait to file until it is caught up or will alternatively file a Chapter 13 and put the delinquent payments into the 5 year plan. The payments must then be maintained throughout the contract term or the Chapter 13 plan.
If the lien is not paid in full or the debtor falls behind, then the bank/lienholder can request the bankruptcy court to lift the automatic stay in a Chapter 13 or wait until the Chapter 7 is case is closed and implement foreclosure proceedings.
To find out more about retaining your house or car during bankruptcy, contact us.
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