1. Home
2. Bankruptcy Articles
3. Secured Debt

FAQ'S

Wednesday, September 17th, 2008

by Theodore Sliwinski, Esq.

Secured Debt

1. How can I tell if a debt is secured?

The only way to tell for sure is to review at the documents that you signed when you incurred the debt. However, the specific type of debt often suggests whether it is secured or not:

a. Home mortgage. We’re starting with the obvious. The company financing your home purchase almost certainly required a mortgage on the house. In New Jersey, almost all home financing is done under a mortgage which provides a quick and inexpensive way for the lender to take the home from you if you default on your mortgage payments.

b.  Car loans. This too is obvious to most web surfers. When you purchasea car, the lender will file a lien on your car. In New Jersey and most states, the liens on vehicles are shown on the title to the vehicle. This lien allows the creditor to repossess the car anytime that you default in your payments.

c. Store purchases. This comes may be a surprise to many net surfers. When you charge something at a store it is very common for the store to retain a security interest in the item you are purchasing. As a result, Sears may be able to take the bed, television, or even the hammer you bought from them if you don’t make your payments. The basis for this security interest is the agreement you signed when you first opened the account. However, don’t fret. Most secured creditors never repossess your appliances, TV sets, or furniture if you don’t pay. The legal fees to repossess the property is not cost effective.

d. Finance company loans. If you borrowed money from a finance company and if they asked you to list things that you own, it is very likely that they obtained a security interest in the things you listed.

2. My husband and I only own one car. If I file for a chapter 7, can I leave my car loan off the list of creditors, and then continue to make payments so that I can keep my car?

You can’t leave the car loan off the list of creditors, but you can continue to make payments on it in order to keep it. Chapter 7 is a liquidation bankruptcy. This means that you are required to list all property that you own in your schedules.  The Trustee will be reviewing your schedules to determine if there is anything he can take to liquidate and pay your creditors. If you do not list your car, then you will be concealing an asset. That is not something that you want to do. If you concealing an asset then this can give the court the grounds to deny your discharge. It can also result in criminal charges being filed against you for bankruptcy fraud.

You are also supposed to list everyone to whom you owe money. In fact, if you do not list a creditor, then you may not get a discharge from that debt. You do not necessarily want a discharge from the creditor financing the car, but there is another reason that you want to be sure to list it. Now that you have decided to list the car and the financing on the car, keeping it is simple. All you have to do is continue to make your car payments and maintain the required insurance on it.

Your creditor will probably also want you to enter a “reaffirmation” agreement. Like the name suggests, you will be reaffirming the loan on the car so that it survives the bankruptcy. If you should later default on the loan, the creditor will be able repossess the vehicle and sue you for any deficiency. Under the new bankruptcy code, you are required to sign any reaffirmation agreement from the bank or auto finance company if you want to keep your vehicle.

3. If I don’t reaffirm my secured debts in chapter 7, when will I have to give the back my property to the creditors?

You are  supposed to file a statement of intention indicating whether you will be surrendering or keeping property secured by consumer debt within 30 days the start of your chapter 7. You are supposed to perform under this statement 45 days after it is filed.  If you do not perform under your statement of intention, then the Trustee has authority to assist secured creditors by requiring that you turn over goods securing creditors claims. If he does this, then he could do so at the time of the first meeting, which is usually 60 days after the date the petition is filed.  As a practical matter, it is exceedingly rare that the Trustees take such action. Therefore, in most cases it will be up to the creditor to assert its security interest. There are three possibilities:

a. The creditor may act immediately. Although an automatic stay is put into effect by the filing of your case, a creditor may ask the court to remove the stay to allow them to take possession of their collateral. The court will almost always remove the stay in a Chapter 7 to allow the creditor to take possession of the collateral, and it may do so as soon as 15 days after the creditor makes the request.

b. The creditor may wait until the discharge is granted. The stay prevents the creditor from taking the collateral ends when the discharge is granted. The creditor is then free to take possession of the property, even though the debt which you owe has been discharged. You may surrender the property. If you choose, you may surrender the property at any time.

c. The creditor may do nothing. If they believe that the expense is greater than what they would realize from the secured property, they may simply do nothing. You may have the use of the property, but their lien will remain. If the property is titled, such as a car or trailer, you will not be able to sell the property since you will not be able to give a buyer a clear title.

Important Note: The creditor is not required to take possession of the property. For example, if the creditor has a lien on that 1990 Honda with a missing engine and more rust than paint, then the creditor does not have to take it off your hands and save you the trouble of disposing of it.

4. What happens when they repossess your car when it has already been paid for?

They shouldn’t be doing that! If the car was, in fact, paid for, you would have an action against the creditor that repossessed it. However, are you sure that it has been paid for? If you have allowed insurance to lapse, then the creditor may have placed insurance on the vehicle and added the cost of this insurance to the balance of the loan. If you were late on payments, then the contract may have provided for the creditor to add more interest and collection fees to the balance.