What Happens to Secured Debt in Bankruptcy?

Deciding to file for bankruptcy is tough, especially when you’re buried under a mountain of different debts, trying to figure out how it all fits together. Secured debts, such as your mortgage or car loan, can feel especially overwhelming—what happens to your home? Your car? It’s a lot to navigate, and the uncertainty can be paralyzing. Whitten & Whitten has helped countless individuals over the years navigate bankruptcies involving all sorts of debts. In this post, we’ll break down what happens to secured debt so you can make the best decision for your financial future.

What Is Secured Debt?

Secured debts are backed by collateral—something of value that the lender has a legal claim to until you fully repay the debt. If you don’t keep up with payments, the lender can repossess or foreclose on the collateral. Common examples of secured debts include:

• Mortgages (secured by a home or property)
• Auto loans (secured by a vehicle)
• Title loans (secured by personal property)

Unlike unsecured debts, like credit card balances or medical bills, secured debt includes both a legal obligation to repay and a lien (claim) on the collateral. This dual nature makes secured debts unique when it comes to bankruptcy proceedings.

How Bankruptcy Affects Secured Debt

Bankruptcy can significantly impact your secured debt. However, the treatment of secured debts depends largely on the type of bankruptcy filed.

Chapter 7 Bankruptcy and Secured Debt

Chapter 7 bankruptcy eliminates most debts quickly by liquidating and selling your assets. Filing under Chapter 7 eliminates your personal liability for secured debts. This means creditors won’t be able to pursue you for the remaining balance after a bankruptcy discharge. However, the lien on the collateral remains, so creditors can still repossess or foreclose on the property securing the debt.

Options for Secured Debt in Chapter 7

You’ll generally have three options for handling secured debts in Chapter 7 bankruptcy:

1. Reaffirmation

A reaffirmation agreement allows you to continue paying your secured debt after bankruptcy. This agreement excludes the debt from being discharged. For example, if you want to keep your car, you may sign a reaffirmation agreement to resume payments, avoiding repossession.

2. Redemption

Redemption lets you pay a lump sum equal to the collateral’s market value rather than the total debt amount. This can be beneficial if the loan balance exceeds the collateral’s worth.

3. Surrender

If keeping the collateral is not financially feasible, you can surrender it to the lender. For example, returning a car to avoid ongoing loan payments releases you from any further responsibility tied to the secured debt.

Chapter 13 Bankruptcy and Secured Debt

Chapter 13 bankruptcy involves creating a three to five year repayment plan for your debt. Secured debts are managed differently under this structure:

1. Pay Secured Debts Through the Plan

The repayment plan is at the heart of Chapter 13 bankruptcy. You’ll propose how to pay secured debts in payments that align with your financial capacity. At the end of the plan, any remaining unsecured portions of the debt may be discharged. For example:

• If you owe $15,000 on a car worth $10,000, the $10,000 is paid as a secured debt, while the remaining $5,000 is treated as unsecured debt.
• Unsecured debt is often reduced significantly or wiped out after plan completion.

2. Adjust Loan Terms

The bankruptcy court may adjust certain secured loan terms under Chapter 13. For example, if the loan balance exceeds the market value of the collateral, the court can lower the loan balance to match the value (a process known as a “cramdown”). Additionally, the court may lower the interest rate.

Chapter 13 bankruptcy is particularly advantageous for managing secured debt if you have a stable income. It allows you to catch up on overdue payments over time while protecting your assets from repossession or foreclosure, offering a clear path toward regaining financial stability.

How a Lawyer Can Help with Secured Debt in Bankruptcy

Navigating bankruptcy laws—especially when handling secured debt—can be complex. This is where a knowledgeable bankruptcy attorney proves invaluable. They can:

• Analyze Your Situation: Attorneys review all secured and unsecured debts to help determine the most effective course of action.
• Explain Your Options: They clarify the pros and cons of options like reaffirmation, redemption, or surrender.
• Customize a Plan: For those filing Chapter 7 or Chapter 13, attorneys create personalized strategies to meet financial needs while safeguarding essential assets.
• Handle the Paperwork: From filing deadlines to reaffirmation agreements, attorneys ensure all paperwork is completed and submitted accurately.

By working with a seasoned attorney, you can ensure your secured debts are handled effectively and that no key details are overlooked.

Let Whitten & Whitten Help You Regain Financial Freedom

Bankruptcy is a way out of the financial burden, but it can be full of significant and confusing decisions—especially regarding secured debts. Whether you choose Chapter 7 or Chapter 13, understanding your options gives you the power to make the best choices for your financial future.

Our team at Whitten & Whitten is here to help. With decades of experience guiding individuals through bankruptcy, we focus on finding solutions that work for you. If you’re ready to take control of your financial future, contact us today.