What are Secured Debts in Bankruptcy?

A secured debt is basically a debt that is “secured” by a piece of property. If you don’t make your payment the creditor can take back the property. The most common examples of this would be a car loan or a mortgage. If you default on any of these loans, the lender can repossess or foreclose on the property. It is possible to stop a foreclosure or repossession by filing bankruptcy.

Most of secured loans are created when you purchase property through financing. Secured debts can also be created by a creditor who has taken out a lien on a piece of property you already own. This usually happens after you have been sued by a creditor and they record a judgment lien against your property. A lien is a legal claim on your property that must be paid before the property is sold.

Types of Secured Debt

Mortgages: These loans are secured by Deeds of Trust. When you sign your loan documents with the lender you are giving them permission to foreclose on your property if you fail to make your mortgage payments.

Home Equity Loan: Sometimes referred to as a “second mortgage,” if you fail to make your payments the lender can also foreclose on your property.

Car Loans: Probably the most common type of secured debt; when you fail to make your car payment the creditor can repossess the vehicle.

Store Charges: There are some department stores that will make you sign a security agreement when using their store charge card giving them permission to take back certain types of property such as appliances.

Personal Loans: Commonly with a personal loan you offer up a piece of your property as collateral, for example a car that has been paid off. This is called a title loan. If you default the lender can repossess the property.

Tax Liens: The IRS can record a lien against your property if you owe them money.

Statutory Liens: If you don’t pay your property taxes, the county can assess a lien on your property. This is done by way of a statutory lien and the county doesn’t have to sue you first.  Another example, is if a contractor is doing work on your house and you don’t pay they can get what’s called a mechanics lien on your property, sometimes referred to as a contractor’s lien.

Judicial Liens: If someone sued you and won a judgment against you they can also get a lien on your property.

What Happens to Secured Debt when you File Bankruptcy?

Loans on Property: Two things happen when you take out a loan on a piece of property. You agree to be personally liable for the debt and you agree that if you don’t pay your debt the creditor can repossess or foreclose on the piece of property.

If you file a chapter 7 bankruptcy you no longer are personally liable for the debt, meaning you can give the car back and the creditor can not go after you for what is still owed. If you are current on your car payments and want to keep the car, the creditor may ask you to reaffirm the debt (become personally responsible for the debt). This is not always a good option. It is very important to discuss this with your attorney before making a decision.

Property Liens: It is sometimes possible to remove property liens by filing a chapter 13 bankruptcy. This is commonly referred to as “Lien Stripping.”

The Law Offices of Melanie Tavare is a debt relief agency. We help people file for bankruptcy under the bankruptcy code.