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Recent Blog Posts
When a Creditor Does Not Enforce its Lien in Chapter 13
When a creditor fails to enforce its lien in a Chapter 7 case, you are left exposed. Not so under Chapter 13.
Non-Enforcement of a Lien in Chapter 7
In a blog post a couple weeks ago we got into what happens when a creditor with a lien on something you own does not enforce that lien in a Chapter 7 “straight bankruptcy” case. This can happen when the collateral depreciates quickly, and may not be worth the cost and effort of repossession. The creditor may not be able to resell it for much, although it may be worth a lot to you.
We used the example of a laptop or tablet computer you bought for $500. It depreciates very quickly because technology moves fast, and people are justifiably afraid of viruses hidden in used computers. But it’s likely worth a lot to you because you’re installed your favorite software. And you constantly put more and more of your data on its hard drive. All your videos, photos, and documents can be stored in the cloud (and probably should be!). But still, for many people their computer is worth to them way beyond what they paid for it.
An Example of Surrendering Your Home Later in a Chapter 13 Case
Here’s an example of how Chapter 13 can allow you to hold onto your home but then change your mind about it later.
Our last blog post introduced the option of saving your home through Chapter 13, while keeping open the possibility of surrendering the home later if your circumstances change.
Advantage of Keeping Your Options Open
Sometimes it’s hard to know whether hanging onto your home is worth the money and effort. For example, if you were about $10,000 behind on your mortgage and property taxes, and could get that money by borrowing from a relative or from a retirement account, would that be worthwhile? What if the home had no equity—the mortgage loan balance was higher than the value of the home? What if you were not confident you could afford to pay back that $10,000 loan? What if the main current reason to stay in the home now would no longer apply in a couple years?
If you filed a Chapter 7 “straight bankruptcy” case you would have to make that decision quite quickly. If your mortgage lender was in the process of foreclosing your home, or was threatening to do so, a Chapter 7 filing protects your home for only about 3 months, sometimes less. You effectively have about that much time to decide whether to keep your home, and to figure out how.
The Option of Surrendering Your Home Later in a Chapter 13 Case
As you decide whether to use the powerful tools of Chapter 13 to hold onto your home, it helps to know that you can later change your mind.
Our last blog post was about surrendering your vehicle in a Chapter 13 “adjustment of debts” case. One major advantage we discussed is being able to change your initial decision about keeping your vehicle if circumstances change.
This can be even more beneficial when dealing with a home because of the much greater amount of money involved. When you’re considering whether to use the tools of Chapter 13 to save your home, it is important to know what would happen if circumstances changed a couple years later and you decided to let go of the home.
Some of the Home-Saving Tools of Chapter 13
Here are just a few of the potential benefits of Chapter 13 “adjustment of debts” if your goal is to keep a home on which you’re behind:
Surrendering a Vehicle in a Chapter 13 Case
Chapter 13 gives you powerful ways to hold onto a vehicle, but it also lets you give up that vehicle without paying its debt.
Our last several blog posts have been about situations in which secured debts can be turned into unsecured debts. They’ve all been about how this can happen in a Chapter 7 “straight bankruptcy.” But how about in a Chapter 13 “adjustment of debts” case?
Today we’ll start a series of blog post about secured debts turning into unsecured ones under Chapter 13. We start with surrendering a vehicle, how that’s done, and why that might be better, or at least usually no worse, in a Chapter 13 case.
Avoiding a “Deficiency Balance” through Bankruptcy Discharge
You have a major advantage in surrendering your vehicle to the vehicle lender when filing bankruptcy. That advantage is that you get to legally and permanently write off—“discharge”—whatever balance you owe—the “deficiency balance.” Without a bankruptcy discharge you would have to pay that “deficiency balance” after giving up your vehicle.
When a Creditor Does Not Have an Enforceable Lien
For a debt to be secured, the creditor has to go through the right legal steps. Otherwise you don’t have to pay the debt.
Expressing Your Intentions with Your Secured Debts
When you file a Chapter 7 “straight bankruptcy” case you list all your debts on the bankruptcy court documents. You separately list secured and unsecured ones. A secured debts is one in which the creditor has a lien on an asset you own. For example, a vehicle loan is a secured debt in which the lender is a lienholder on your vehicle’s title.
As to each of your secured debts, you inform the creditor whether you intend to keep the asset or not. If you intend to keep it, you also state what you intend to do with the debt. For example, with a vehicle loan, if you state that you intend to keep the vehicle you would likely also state that you intend to “reaffirm” the debt—that is, pay the debt under its usual terms in order to be able to keep the vehicle.
When a Creditor Does Not Enforce its Lien
Sometimes, even if what you bought is legally collateral on a debt, you can just write off and not pay the debt yet keep what you bought.
For the last 3 blog posts we’ve been talking about those relatively rare situations when in bankruptcy you can treat a secured debt as an unsecured one. This is rare because generally liens are NOT discharged—written off—in bankruptcy. A secured creditor’s right to enforce the lien normally survives bankruptcy.
As a result most of the time you have only two choices with a secured debt in bankruptcy. First, you can keep whatever asset of yours upon which the creditor has the lien. But then you have to pay the debt. Or second, you can surrender the asset with the lien to the creditor. Then you can discharge the debt.
But sometimes you can have your cake and eat it too—keep the asset and pay nothing.
Debt Secured by Judgment Lien Can Often Be Turned into an Unsecured Debt
A judgment lien turns an unsecured debt into one secured by a lien on your home. Bankruptcy can undo that, and write off the debt.
Very Different Treatment of Unsecured Debts and Secured Debts
A couple blog posts ago we discussed how differently unsecured and secured debts are treated in bankruptcy.
Most debts that do not have a “lien” on any of your property or possessions are legally, permanently written off in bankruptcy. However with secured debts the lien that the creditor has in your asset is NOT USUALLY written off or affected in any way in bankruptcy. That means the creditor can take collection action against your asset through that lien after the bankruptcy case is completed. As a result usually you have to pay the debt.
But in certain situations bankruptcy CAN turn a secured debt back into an unsecured debt. We focus on another one of those situations today.
Secured Debt Treated Like Unsecured Debt after Collateral Surrender
A secured debt effectively turns into an unsecured debt if you surrender the collateral, which may make sense to do more than you think.
“General Unsecured” Debts and Secured Debts
Our last blog posts described the huge difference in the treatment of “general unsecured” and secured debts in bankruptcy. “General unsecured” debts are discharged—legally and permanently written off. But with secured debts, the lien that the creditor has in something you own is not usually affected in bankruptcy. The lien continues in effect, giving the creditor continued rights to your asset after the bankruptcy case is completed, including usually the right to repossess or foreclose. So if you want to keep that asset, usually you have to pay the debt.
However, last time we listed 3 situations in which bankruptcy effectively turns a secured debt into an unsecured one. We focus on the first of those situations today.
Secured Debts Treated Like Unsecured Debts in Chapter 7
A secured debt can be handled like an unsecured debt if you surrender the collateral, “avoid” a judgment lien, or just keep the collateral.
The “Discharge” of “General Unsecured” Debts
In our last few blog posts we have shown how “general unsecured” debts are handled under Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts.” Most of the time those debts are simply discharged—legally written off—under Chapter 7. They are also discharged at the successful completion of a Chapter 13 case, usually but not always after partial payment.
Secured Debts
Debts that are secured by a lien on something you own are usually treated quite differently. The debt itself may well be discharged in the bankruptcy case just like an unsecured debt. But you also have a lien to contend with.
A lien is a creditor’s “interest in [your] property to secure payment of a debt.” (See Section 101(37) of the Bankruptcy Code.) A lien is not discharged in bankruptcy. It’s a property right that you have to deal with separately from the debt itself.
"General Unsecured" Debts Discharged in Chapter 13
To the extent you do not pay off your debts during a Chapter 13 payment plan, the remaining balance is usually legally written off forever.
Our last two blog posts were about how Chapter 7 “straight bankruptcy” deals with “general unsecured” debts. But how about Chapter 13 “adjustment of debts”? What happens to those simple debts, which are neither secured by a lien on something you own nor are not a “priority” debt?
“Priority” and “General Unsecured” Debts
Let’s go back and distinguish these two kinds of debts. The distinction is crucial because of how they are treated under Chapter 13. You have to pay “priority” debts in full during the course of the 3-to-5-year payment plan. You generally only have to pay “general unsecured” debts to the extent you have money to pay them.
So what’s the difference? Simply, “priority” debts are specific categories of debts that Congress has decided must be treated specially. They are debts that the law says that in a Chapter 13 case you must pay in full before paying the “general unsecured” debts anything.
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