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Secured debt:  the house & the car

A home and a car are generally the biggest purchases an individual makes and they are usually made with a purchase money loan.  The lender takes a security interest in the asset purchased which protects the lender until the loan is paid.  Of all the assets of the typical family, these are the most important to their day to day living:  a place to live and a way to get to work.

So, what happens to secured debt when the borrower/purchaser files bankruptcy?  The lender is a secured creditor, with rights in the asset that is the collateral as well as rights against the borrower.  The general rule in bankruptcy is that liens are not altered by the bankruptcy or the discharge of the borrower's personal liability.

Assume that whatever chapter bankruptcy you file, the lender does not want the collateral back:  the lender wants money.   So, if you are willing to continue paying on the contract or loan, the secured creditor is generally delighted:  they are not looking for ways to dispossess you, unless you don't pay.  

Can I keep the house?

The loan is in default

Chapter 7

Suppose that at the commencement of the bankruptcy case, you are behind on the house payments.  In Chapter 7, the automatic stay will prevent the creditor from initiating or continuing a foreclosure proceeding for so long as 1) the stay is not lifted by the grant of relief from stay;  2) the property is property of the bankruptcy estate; and 3) the debtor/borrower has not received a discharge.   

When any of those things happen, the creditor is free to enforce whatever rights it had before bankruptcy.  So, if you want to keep the asset that is security for the debt, Chapter 7 only buys time, but not any solution as to the default, unless you can redeem the collateral.  More about redemption.

Chapter 13

In Chapter 13, the debtor gets a chance to cure the arrears on secured debt through the payments made to the plan, so that at the completion of the plan, the default is cured.  Or, if the value of the asset is less than what is owed against it, the lien may be stripped down to the value of the asset at the beginning of the case. 

  The Code contains a prohibition on stripping down consensual liens like mortgages  when the debt is secured only by the debtor's residence.  Some courts permit a debtor to strip off a mortgage that is not secured by any value (California is among these courts);  others hold that the lien cannot be modified or stripped off regardless of the value of the underlying security. 

  Lien stripping in Chapter 13

The lien stripping power is frequently applied to cars whose value at the beginning of the case is less than what is owed against the car.  The value of the lender's claim is reduced (stripped down) to the value of the car at filing. The debtor's ability to stip liens on cars was limited by the 2005 amendments to the Bankruptcy Code. More on newer cars in Chapter 13. 

  Choices as to secured debt in Chapter 7

       House payments delinquent?

Cross collateralization

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