Chapter 7 Bankruptcy and Secured Debts
Chapter 7 Bankruptcy and Secured Debts
A secured debt consists of two parts: a promissory note under which you are personally liable to your creditor, and a lien which gives your creditor recourse against your property in the event you breach the terms of the promissory note by falling behind on your payments.Since a Chapter 7 bankruptcy only discharges personal liability for your debts, you must have a strategy for dealing with liens if you want to keep your property. Otherwise, your creditor retains the right to take your property in satisfaction of the debt after the bankruptcy is over.
‘Redeeming’ Property
Chapter 7 bankruptcy offers a few ways to eliminate liens on property that you want to keep. You can ‘redeem’ property by buying it back from the creditor (paying the value of the property to the creditor in one lump payment). You can also ‘reaffirm’ debts under certain circumstances by agreeing with the creditor that you will retain personal liability on the debt after bankruptcy. Reaffirmation agreements can sometimes involve modifications of the original loan terms in order to make the payments more affordable. Finally, you can ‘avoid’ certain nonconsensual liens on property if the lien ‘impairs’ one of your bankruptcy exemptions (this topic deserves its own entry and will be covered later).
Viable Options
As you can probably see, Chapter 7 bankruptcy provides a few viable options for dealing with securitized car loans and other debts secured by personal property, but it does not offer a good way to save a home from foreclosure. First, you cannot ‘cram down’ your mortgage debt by redeeming it in a Chapter 7. The process simply is not available for debts secured by real estate and probably wouldn’t be a real option for most folks anyway.Second, while creditors have the option of reaffirming a mortgage, many will not agree to reaffirm if you are behind on payments and there is a decent return to be made by taking your house. Unfortunately, the frustrations encountered in trying to obtain mortgage modifications outside of bankruptcy survive a CH 7, at least for now, and unlike in a CH 13 bankruptcy, a CH 7 bankruptcy provides no process for catching up on missed mortgage payments. If you want to discharge debts and keep your house, a CH 13 bankruptcy will provide you with more options.
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