Can I keep my house and car if I file bankruptcy?
Some debts are “secured” debts, and some are “unsecured” debts. Secured debt is debt that involves having something on the table that your creditor can take if you do not pay what you owe. For example, if you fall behind on your mortgage payments, the bank can foreclose (take) your home and sell it to get the money you owe. The house is collateral. Another example of secured debt would be a car loan. If you fall behind on your car payments, your creditor will try to repossess your car. In both of these examples, the creditor has an interest (rights) in the property used as collateral.
What is a “secured debt?” and who is a secured creditor?
Usually, a debt is secured and the lender has a “security interest” and is a “secured creditor”. If that creditor lent you all or part of the purchase price of the asset and reserved a “security interest” in it. The latter is referred to as a “purchase money security interest” and a creditor who has one is highly favored among creditors in a bankruptcy proceeding. There are other types of security interests but, for the sake of brevity, only the most common are discussed here.
Can a secured debt discharge in bankruptcy or What is a reaffirmation?
Bankruptcy is often an effective way to deal with secured debts. When you file for bankruptcy, you must tell the court what you intend to do with those assets that are collateral for secured debts. Even if your debt is discharged, the creditor still has an interest (rights) in the secured property. In Chapter 7 bankruptcy, you have three options for dealing with secured debt:
1) return the property and owe nothing;
2) keep your property and “reaffirm” your debt;
3)“redeem” your property and pay the creditor the fair market value of that property (as opposed
to what you had agreed to pay for it).
The second option of reaffirming the debt means that the debt is not discharged by the bankruptcy. If you fail to pay what you owe, your creditor can still sue you for not keeping the payments up.
It is therefore imperative that you continue to make these payments and to make them on time. If you are behind on your mortgage payments or your car payments, and you have filed a Chapter 13, the amount that you are behind can be repaid in the Chapter 13 bankruptcy payment plan. One of the most common uses of a Chapter 13 bankruptcy is to stop a foreclosure and provide the borrower (that’s you) an opportunity to create and implement a repayment plan. The end result in an ordinary case, if the plan is performed by you, is that you keep your house or car or both, you make your current mortgage/car payments, and you will have paid the arrears off in thirty-six months as part and parcel of your repayment plan. In Chapter 7, you may choose to simply surrender the property, sometimes referred to by the lender as “collateral”, to the lender. As with most rules, there are exceptions. Not all security interests are absolutely enforceable by the lender in a bankruptcy proceeding.
Call our office at 619- 235-4095 for a free bankruptcy consultation to discuss further details.