if you do file for Chapter 7 bankruptcy, you may be able to keep the trustee from selling your house through one of the following methods:
• Offer to substitute cash for the amount of non- exempt equity. you may be able to convince the trustee not to sell your house if you can come up with as much cash as would be available from the proceeds to pay unsecured creditors. you may be able to raise the cash by selling exempt property or using income you earn after you file.
ExAMPLE: the robertsons have approximately
$5,000 of nonexempt equity in their home. all of their home furnishings are exempt. after discussing the matter with the trustee, they sell three pieces of furniture and a camera for a total of $1,800 and scrape together $2,700 extra cash from income earned since they filed for bankruptcy. they offer the cash to the trustee as a substitute for the nonexempt equity. the trustee accepts the money, because the creditors will end up with almost as much as they would have gotten if the home were sold—and the trustee will be spared the hassle of selling the robertsons’ home.
• File for (or convert to) Chapter 13 bankruptcy.
Chapter 13 bankruptcy lets you pay your debts out of your income rather than by selling your
property. if you file for Chapter 13 bankruptcy, you won’t have to give up your home, even if you have nonexempt equity. (however, you will have to pay your unsecured creditors at least the value of your nonexempt property over the life of your plan.) Chapter 13 bankruptcy also permits you to spread out repayments of missed installments, taxes, and late charges on a mortgage. and, if your lender has begun foreclosure proceedings, Chapter 13 bankruptcy can halt them as long as your house hasn’t yet been sold. (For more information on Chapter 13, see Chapter 13 Bankruptcy: Repay Your Debts, by stephen elias and robin leonard (nolo).)
you can convert to Chapter 13 bankruptcy any time during a Chapter 7 bankruptcy proceeding.
if you miss mortgage payments after you file for Chapter 7 bankruptcy, however, some courts won’t let you include them in your Chapter 13 repayment plan. so try to make all payments due after you file for Chapter 7.
If the lender refuses your payments. As explained in
“How Bankruptcy Affects a Typical Homeowner,”
above, mortgage lenders sometimes refuse to accept payments once you file for bankruptcy. If this happens to you, deposit the payments in a separate account solely for this purpose. This will help you make sure you have enough money to pay off what you owe once your bankruptcy ends. ■
C H A P T E R
5
Secured Debts
Secured Debts ...86 Security Interests...86 Nonconsensual Liens...88 What Chapter 7 Bankruptcy Does to Secured Debts ...89 Eliminating Liens in Bankruptcy ...89 If You Don’t Eliminate Liens ...90 Ways to Deal With Secured Debts in Bankruptcy ...90 Surrender Property...90 Avoid (Eliminate) Liens ...91 Redeem Property ...95 Reaffirm a Debt ...96 Pay Off the Lien Later in a Follow-Up Chapter 13 Bankruptcy ...98 Lien Elimination Techniques Beyond the Scope of This Book ...98 Choosing the Best Options ...98 What Property Should You Keep? ...99 Real Estate or Motor Vehicles ...99 Exempt Property ...100 Nonexempt Property ...101 Step-by-Step Instructions ...102 How to Surrender Property ...102 How to Avoid Liens on Exempt Property ...103 How to Redeem Property ...113 How to Reaffirm a Debt ...116
T
his chapter explains how bankruptcy law handles secured debts. First, you’ll learn how to tell whether a debt is secured. then, we explain what happens to secured debts in bankruptcy. we cover ways to turn secured debts into unsecured ones (and why that’s important), and what choices bankruptcy gives you for dealing with secured debts that can’t be turned into unsecured ones. Finally, we provide step-by-step, do-it-yourself instructions for some simple procedures for handling secured debts. (if you opt for one of the complex procedures, we explain the basics, but you’ll need the help of a lawyer.)along the way, you’ll need to learn a bit of peculiar terminology and a few detailed rules, but it’s worth it:
you might be able to save a lot of money and keep property you’d otherwise lose.
Before we get into the details and the paperwork, here’s a brief summary of what’s likely to happen to your secured debts and the property that secures them.
First, the bad news:
• if you have a mortgage on your home or a home equity loan, bankruptcy won’t get rid of it.
• if the government has a lien on your home for unpaid taxes, you can’t remove it.
now, the good news:
• if you have a car loan and you want to keep your car, you may be able to keep it by just paying the car’s current replacement value (what you could buy it for, considering its age and condition), rather than the amount due on the loan. you’ll need to come up with this amount in a lump sum.
if you can’t raise the cash, you’ll have to sign on to the original agreement with the lender (that is, reaffirm the debt) or surrender the car and buy a cheaper one. if the car is unreliable or in poor condition, that’s probably a good choice. on the other hand, the replacement value may be low enough to warrant paying for the car, despite its condition.
• if you have a car loan and you decide to give up your car, bankruptcy will eliminate any remaining balance due on the loan.
• if you lost a lawsuit or small claims case, and your opponent recorded a judgment lien on your property for the amount you owe, you can probably get rid of this lien, depending on what you were sued for, whether the property is
exempt, and how much equity you have in the property.
that’s the big picture for the most common kinds of secured debts. now it’s time to learn the details about:
• which of your debts are secured
• which secured debts you can turn into unsecured ones (via lien avoidance), and
• how to deal with the debts that remain secured.
You may be able to skip this chapter. If you have no secured debts, you won’t need the information in this chapter.
Secured Debts
a secured debt is linked to a specific item of property, called collateral, that guarantees payment of the debt.
if you don’t pay, the creditor is entitled to take the collateral. For example, mortgages and car loans are secured debts.
when you fill out your bankruptcy forms, you list all of your secured debts on schedule d. (Ch. 6 explains how to do this.) Keep in mind that there are two kinds of secured debts: those you agree to, such as a mortgage, and those created without your consent, such as a lien against your property recorded by the irs because you haven’t paid your taxes.