What Happens to Secured Debt in a Chapter 7 Case?

Dealing with Chapter 7 creditors is a big part of the process of filing bankruptcy. Each creditor has the right to request payment in full for its debt, assuming the debt is legally binding. However, some creditors receive a higher level of priority than others do when it comes to bankruptcy. In the case of secured debts, the debt is protected, to a certain level, from other creditor claims by the value of the property. Understanding Chapter 7 bankruptcy and creditor claims is often difficult, which is why using an attorney is often recommended.

Secured Debt

Secured debt has a unique place within a Chapter 7 bankruptcy. This is any type of debt backed by the value of the assets the funds were used to purchase. The most common secured debt is a mortgage. The lender has protection here if the homeowner defaults on the loan. The secured property (in this case the home) can be seized and sold to repay the debt. But, bankruptcy can put a stop to that process. There are several things that can happen to Chapter 7 creditors with secured debt.

• The individual who wishes to remain in the property, will need to stay up to date on payments. Further, the lender and property owner need to reaffirm the debt, which means both need to agree to the terms of the loan as they stand.
• If the property has excessive equity in it, such as a mortgage paid down so that there is a sizable amount of value in the home not under the loan, it may become subject to seizure. The only way to protect a secured asset with a lot of equity is through bankruptcy exemptions.
• In situations where the bankruptcy filer wishes to get out of the loan, he or she can do this by turning over the assets to the bankruptcy trustee, who will then make a decision about whether to sell the property or hand it over to the original lender.

It is important to note that individuals cannot keep property that is discharged in bankruptcy. If the bankruptcy trustee rules the debt discharged, it is likely the property will need to change hands, depending on what type of secured debt it is.

Complexities Warrant Using an Attorney

Because of the difficulty in managing and maintaining property through Chapter 7, it is always a good idea to work with an attorney throughout the process. In many cases, Chapter 7 creditors who hold secured debts can be dealt with in the bankruptcy filing.