Many people who file bankruptcy wonder what it means to have a “secured creditor.” A secured creditor is a person or entity to whom the debtor owes an obligation which is backed by real or personal property. That property is often called “collateral.” The secured creditor has a secured interest in that collateral. The reason this is important in bankruptcy is because secured creditors must be dealt with very differently than unsecured creditors.
An example of a secured debt is a mortgage, because the lender has security interest in the house. Another example is a car loan for the same reason. Unsecured debts are those like most credit cards or medical debts. Of course, unsecured debts can become secured debts if the creditor is able to attach a judgment or lien to the property of a debtor.
In the old days of bankruptcy, there was little that could be done to protect consumers who filed bankruptcy from those creditors holding secured claims. When the Bankruptcy Code was adopted, however, all sorts of options came into existence for the alteration of secured claims. This offers significant benefits to debtors with secured debts.
One way the Code affects the rights of creditors is that the automatic stay basically prevents the creation of liens, perfection of secured claims, and enforcement of judgments once the bankruptcy petition is filed. There are also rules often referred to as “turnover provisions” that allow a debtor to recover property from a secured creditor who has repossessed or foreclosed prior to the filing of the bankruptcy case. There are even options to avoid liens and security interests. A debtor has all these tools in her toolbox. Using these tools, she can very frequently entirely eliminate security interests in garnishments, repossessions, setoffs, judicial liens and more.
The options under Chapter 7 are different and quicker to offer a final solution in comparison with the options under Chapter 13. But that doesn’t mean they aren’t powerful and helpful to many debtors. The main options are “redemption,” “reaffirmation” and “surrender.” These options are commonly used to deal with car loans and similar personal property that is secured. Read more about keeping a car loan through a Chapter 7 bankruptcy here.
In Chapter 13 bankruptcies, debtors have a few of options when dealing with secured creditors. The debtor can surrender the property, much like in Chapter 7. The debtor can pay the debt outside of the bankruptcy and basically continue as though the bankruptcy never was filed. Finally, the debtor can pay the debt within the reorganization plan. This last option provides various benefits like lowering the value, lowering the interest rate, or providing time to make up for delinquent payments.
Whatever an individual debtor’s situation may be, these options can be very difficult to understand fully. This information and decisions that follow could very well mean the difference between a debtor keeping and losing his home. While the options are there, it takes experience and depth of understanding of the Bankruptcy Code to fully use them. That is yet another reason to seek the advice of an experienced bankruptcy attorney.