Secured Debt in Bankruptcy

What is Secured Debt?

Secured debt is any loan tied to (“secured by”) property (“collateral”) which the lender can take back (“repossess” or “foreclose”) if you miss your payments.

Examples of secured debt:

  • Home loans and home equity loans.
  • Loans to buy cars, motorcycles and mobile homes.
  • Consumer loan “purchase-money security interests” in appliances, electronics, furniture, and jewelry.
  • Loans to buy boats or other recreational vehicles.
  • Title loans on paid-for cars.
  • “Non-purchase-money security interests” in household goods and furnishings.


The Two Main Types of Secured Debt

In bankruptcy, how you handle a secured debt depends on whether it is a purchase money or non-purchase money loan:

  • A purchase money security interest is a loan which finances the actual purchase of an item–for example, a loan to buy a car, appliances,  or jewelry.
  • A non-purchase money security interest is a loan made by a lender (typically a loan company) who asks you to list things that you already own to secure the debt. For example, you might be asked to pledge your household furniture as collateral for a loan.


Purchase Money Security Interests

In Chapter 7 bankruptcy you choose one of  three options:

  • Reaffirmation: Keeping the item (collateral) and and agreeing to continue to owe and pay the secured debt.
  • Redemption: Keeping the item (collateral) and paying the creditor the current value of the item in a lump sum. That value may be less than what you still owe. For example, if you owe $1,000 on a washer and dryer that is now only worth $500, you might agree to redeem the washer and dryer by paying the creditor $500.
  • Surrender: Giving the item back to the creditor and wiping out the debt in bankruptcy.


Non-Purchase Money Security Interests

If the loan is a non-purchase money security interest you may be able to free your property by filing a motion to avoid the lien in bankruptcy. This allows you to keep the property without paying the creditor anything and to set aside (“avoid”) a non-purchase money lien on your household goods and furnishings or similar property. You might even be able to set aside a judgment lien on your home.


The Relationship Between Secured Debt and Bankruptcy Law

In bankruptcy law, both you and your secured creditors have rights. This does not mean, however, that they can seize your car or other property without regard to strict legal guidelines and protections. Once you file bankruptcy in Tennessee, you are immediately granted an automatic stay. This stops all creditors — including secured creditors — from trying to collect on the debts. When secured creditors are notified of a bankruptcy filing, they must get permission from the court before they can attempt to proceed against any of your property. This is true even if they are legally entitled to acquire possession. This gives you the breathing room you need to decide which of your rights to exercise with respect to the secured loan.

Guidance from a bankruptcy lawyer can help you determine how to get rid of the debt you cannot afford to pay and keep the things that matter most to you.
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