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Liens and Mortgages Are How Creditors Make Sure They'll Get Paid

Some Liens Are Invalid and Can Be Eliminated, Others Can Be Adjusted

Bankruptcy Can Eliminate Secured Debts and Let You Keep the Property

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Debt is "secured" when creditor retains legal rights to the property financed

Secured debts include your home mortgage loan, and second mortgages, your car loan, furniture, jewelry and appliance loans. Tax liens also secure the payment of taxes by impairing your clear title to property

In general, bankruptcy affects the debt you owe, but does not take away the secured creditor's rights to the property. In some instances, if you can't pay for it, you can't keep it. But during a Bankruptcy filing, your bankruptcy attorney can force your creditors to prove their liens are valid and unavoidable

Chapter 7 and Chapter 13 affect secured debts differently

Secured debts in Chapter 7

Chapter 7 discharges or eliminates the debt (a claim for money against you personally), but does not destroy the secured creditors right to recover the property if you fail to continue regular payments coming due under the original loan agreement. Furniture, appliance and jewelry creditors are frequently willing to negotiate a fair "reaffirmation agreement" to compromise their rights to the property and allow you to pay a reasonable value for it. Many times, such creditors simply walk away and abandon their security interests. Home mortgage, second home mortgage and car loan creditors, however, will not generally negotiate at all. If you are to keep the home and vehicle after Chapter 7, you must continue regular monthly payments and continue to insure the property against theft and destruction

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After Chapter 7, you would have four options regarding secured debts:

  1. Surrender the property and pay nothing (you are protected in your possession of property for 4-5 months while the case is pending, even when you fail to make payments, unless the creditor gets Court approval to repossess the property before the case is closed)
  2. Continue regular monthly installments and keep the property insured, without entering into a formal agreement obligating you to repay any certain sum (this option is NOT AVAILABLE over the objection of the secured creditor in some jurisdictions). Under this option, if you later decide to surrender the property for any reason, you will have no further responsibility to the creditor
  3. Enter into a formal reaffirmation agreement, which must be approved by the Court, and which will allow you to retain the property so long as you continue to the pay the payments called for under the agreement. (Under this option, if you later default on the payments, the creditor may sue you to collect any balance remaining after the property is recovered and liquidated)
  4. Pay a lump-sum to satisfy the creditor's security interest (called redemption). This option is very practical, provided you can gather funds necessary to buy out the creditor's interest

In Chapter 13, you can modify secured creditors' rights, except creditors secured only by an interest in your home

  1. You can catchup on back mortgage payments, but you must resume and continue regular monthly payments after the case is filed
  2. You can cram-down on secured creditors (that is, propose to pay just the value of the property that secures the debt)
  3. You can also sell or surrender property, if you do not will to keep and pay for it
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