Will I Still Owe On Secured Debts After I File Bankruptcy

Yes and No . . . There are a variety of scenarios that can change the outcome of what is owed on secured debts. A secured debt is defined as a debt that has collateral or a hard asset that functions as security for the purchase. If you take out a car loan, then the creditor will usually have a security interest in the car; if you buy a house, the creditor will have a security interest in your home or other realty; and if you open a business, a creditor may have a security interest in the assets of the business.

Has The Security Interest Been Created?

Whether or not a security interest has been created depends upon whether or not the action creating the security interest has occurred. For cars, the pink slip must be registered with a lien holder at the DMV; for real estate, there must be a deed recorded with the local recorder's office; and for business assets, there must be a valid UCC-1 Financing Statement filed with the Secretary of State. There are other ways to create a security interest for different types of assets in the State of California.

Once a proper security interest has been created, then the Creditor has two forms of protection. The creditor can look to the collateral for collection, or the Creditor can look to the person holding the debt as in many cases, they are personally liable for the debt.

Liability For Secured Debts In Chapter 7 Bankruptcy

If the case is filed as a Chapter 7 Liquidation case, then a person's personal liability is erased. It no longer exists. The Creditor is still protected, but only to the extent of being able to pursue repayment through the sale of the collateral.

For many people who file Chapter 7, they wish to keep their assets, their homes, cars, etc. Many people wish to work with their Creditors to maintain the assets, and they are usually able to do so. If a person chooses to keep any asset, then he or she must continue with ongoing payments even after the bankruptcy case is filed.

Some people choose to use the bankruptcy for the fresh start if affords, and may decide to "walk away" from secured debt obligations. This, too, is a common outcome for Chapter 7.

Liability For Secured Debts In Chapter 13 Bankruptcy

If the case is filed as a Chapter 13 or a Chapter 11, there is a greater range of possibilities in terms of what happens to the secured debt.

If a person has real estate and the debt is a first mortgage, and the person is going to keep the property, then the ongoing payments must be made. If they are not able to make the payments, then the Creditor can ask the Court to allow the property to be taken out of the bankruptcy in order to initiate foreclosure proceedings. If the property is a personal residence, and a person chooses to not pay the mortgage, because they are modifying their mortgage, or short selling the property, then the bankruptcy does assist in adding extra protection in order to allow the transaction to complete.

In the end, whether keeping a property, modifying the loan or selling it, a bankruptcy filing will prevent personal liability from being assessed against an individual.

If the secured debt is a second or third mortgage on property, and the property has depreciated in value, the Chapter 13 may allow for the re characterization of the debt, so that after the bankruptcy case is filed, the debt becomes unsecured, like a credit card debt. If this were to occur, then the ongoing payments to the Creditor would not have to be made and the debt would be erased upon completion of the case.

What Secured Debts Can Be Modified By Bankruptcy?

Some secured debts can be modified or changed by a bankruptcy filing. Car loans can be "redeemed" in a Chapter 7 case, and "crammed down" in a Chapter 13 or 11 case. These terms refer to the reduction of the principal of the debt — to a sum that is equivalent to the value of the car on the date the case is filed.

Other secured debts also have the potential for a "cram down" in the reorganization bankruptcy chapters (Chapter 13 and Chapter 11). To fully understand how a bankruptcy filing may affect your assets, an experienced bankruptcy attorney should be consulted in person, to allow a detailed analysis of your personal situation.