What is Secured Debt in Bankruptcy? (2019)

Published on January 20, 2021

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When you get a loan by promising property as collateral to a creditor, you have a secured debt. A Chapter 7 bankruptcy can eliminate your obligation to pay a secured debt. But, bankruptcy can’t prevent creditors from taking any property you pledged if you default on your payments. This article explains secured debt and what happens to it in bankruptcy.

What is secured debt?

There are two types of debt: secured and unsecured. A secured debt gives the creditor a security interest in some piece of property, like a house or a car. An example of secured debt would be a mortgage or a car loan. An unsecured debt, like the name suggests, does not give the creditor any rights to your property. An example of unsecured debt would be a credit card or personal loan.

A creditor with a security interest is called a secured creditor. They have the right to repossess or force a sale of the property used to secure the debt in the event of default. The secured creditor will generally use the money they get from selling the property to satisfy the remaining balance on the loan.

If the value of the property is not enough to pay back the rest of the loan, a secured creditor can also sue in order to recover the remaining balance (called the deficiency balance). Your obligation to pay the deficiency balance can be discharged in a successful Chapter 7 bankruptcy.

How do I know if I have secured debt?

If you have a car loan or a mortgage, it is likely that you have secured debt. Generally, any loan which is received in connection with a property purchase will be secured by that property. The best way to determine whether a debt is secured debt is to check the loan agreement.

Secured Debt Example

Sally gets a loan from the bank for $10,000 to purchase a car. The loan is a secured debt, because it gives the bank the right to repossess Sally’s car if she defaults on her loan payments. A few years later, Sally still has a $7,500 balance on the loan, but her car is only worth $5,000.

If Sally fails to make payments on the secured debt, the bank can repossess and sell her car to meet the loan obligation. Because the loan balance even after the car sale is $2,500, the bank can sue Sally to collect that amount.

If Sally successfully discharges her debts in bankruptcy, she no longer has to pay the $7,500 balance on her loan. But, the bank can still repossess her car. Even if selling the car does not pay off the debt, Sally would not have to pay the remaining $2,500 balance — it would also be discharged.

Read more: https://upsolve.org/learn/what-is-secured-debt-in-bankruptcy

Are Secured Debts Included in Bankruptcy

Are Secured Debts Included in Bankruptcy, What is Secured Debt in Bankruptcy? (2019).

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