What can happen to creditors with secured debt during Chapter 7?

When a person files for Chapter 7 bankruptcy, one of the biggest challenges that have to be faced is dealing with one’s creditors. Providing that the debtor’s obligation to the lender is legally binding, every creditor may ask for full repayment of its debt. The bankruptcy process gives different levels of priority to each creditor. Secured debts are those that secured by a collateral so it has a higher priority than some of the debts.

Under a Chapter 7 bankruptcy, the treatment of secured debts is unique. Again, secured debts are those that are collateralized by certain assets of the borrower. Mortgages are the most common type of secured debt, and the lender is afforded some protection by the collateral if the borrower defaults on the loan. The home, which is usually the collateral for mortgage debts, may be claimed by the creditor and sold so that the debt is repaid. Nevertheless, bankruptcy can halt that process. If a creditor holds a secured debt Chapter 7 dictates that certain scenarios will occur:

1. The borrower, if he wishes to be able to continue residing in the property, will have to fulfill financial obligations to the creditor on time. If the creditor and the borrower reaffirm the debt as required by Chapter 7 bankruptcy, then both parties agree to the given terms of the loan.

2. If there is excessive equity in the property and there is a considerable amount of value in the property that is not subject to the loan, then it may be seized. However, through bankruptcy exemptions, a secured asset that has a lot of equity may be protected.

3. In instances when the debtor wants out of the loan, the debtor can turn over the property to the court appointed trustee, who can decide whether the property ought to be sold, or turned over to the creditor.

In order to protect one’s rights, both creditor and debtor should seek the advice of a lawyer.