Debt discharge: Car, home and other secured loans
There are many myths about filing for bankruptcy, but two of the most persistent are actually two sides of the same coin.
On the one hand, people often believe that when they file for bankruptcy, they will lose everything. That, of course, is not true. Read more about bankruptcy relief.
Collateral without repaying the loans
It is also a common belief that filing for bankruptcy means that all their debt is gone and that they can keep their vehicles, houses and other assets that served as collateral without repaying the loans.
This is also not true.
In this series of articles, we talk about how and what debts are discharged in a typical bankruptcy case. In this article, we focus on secured debt: that debt for which you put collateral that the creditor could use and sell if you did not pay your loan as agreed.
One loan: two agreements
A secure loan actually involves two different agreements: an endowment and a security agreement.
The first, the promissory note, contains the conditions for the loan. It contains finances for the amount you will finance, additional fees, interest rates, interest rate, payment amount, loan length, payment dates, payment method, conditions and amount of late fee, the total amount that will be paid over the life of the loan and much more information on how you are expected to repay the money you are borrowing.
A security agreement is a separate agreement, although it may be included in the same document as the bill of exchange.
A security agreement gives a loan to those interested in the property you have funded. The item becomes collateral for the loan. The lender agrees to issue the purchase price of the item.
You agree that if you do not pay in accordance with the terms of the promissory note, the lender has the right to seize the property (cancellation or foreclosure), liquidate (sell) and apply the proceeds of the sale to the amount that you still owe to the lender.
What happens to a secured bankruptcy loan?
In a bankruptcy case, the debenture obligation – the requirement to repay the loan – is subject to discharge. Therefore, if you do nothing to change the outcome, the promise you made to return the money will be dropped when you receive your General Discharge.
Sounds great, doesn’t it? That’s what you’re looking for in Chapter 7 – Exemption from Paying Those Heavy Bills.
But there is a blow. The security agreement has not been terminated. The landlord still has an interest in the property and the right to recover or confiscate the property if you do not pay. Some people may find themselves with a repaid loan and no obligation to pay but still hold collateral.
However, it is not likely to hold that collateral for long. This is because the lender will almost always want the property to pay at least part of what you owe.
The landlord will also not have to wait until the end of Chapter 7 to begin this process. When you file a case in Chapter 7, one of the documents included in the paperwork is called a Statement of Intent. In the Statement of Intent, you list all your secured debts and state whether you intend to keep the property or hand it over to the loan.
If you do not wish to retain the property, you are required to make it available to the secured creditor no later than 45 days after the meeting of the creditors. If you did not surrender the property then, the secured creditor may commence foreclosure or repossession without obtaining permission from the bankruptcy court.
Excavation is especially useful if you owe more than your property is worth. It is used almost exclusively for personal property such as vehicles or appliances. It allows you to pay off the value of the property to the creditor, usually in a lump sum.
This will satisfy both the bill of exchange and the security agreement. To do this, some lenders refinance their assets through other lenders, such as companies that specialize in helping debtors repurchase the property.
Because many borrowers either cannot raise the money to seize the property or do not want to pay higher interest income, the buyout company will collect, many borrowers will choose to reaffirm the debt they already have.
Reaffirmation is a process that takes a loan out of bankruptcy
Reaffirmation is a process that takes a loan out of bankruptcy. The exemption will not apply to the reaffirmed loan, and the borrower remains liable to the lender on the bill of exchange and security contract until the loan is paid off.
Debtors can only confirm loans if they can actually afford the payments. Most of the time, bankruptcy schedules, including a list of income and expenses, will show that there is room in the payment budget.
If it does not exist, it may be necessary to hold a hearing before the bankruptcy judge before approving the confirmation agreement.