Newburgh Area Lawyers Discuss How Chapter 13 Bankruptcy Deals with Secured Debts
A Secured Debt is one in which a creditor has a lien on some item of a debtor’s property to insure payment of the debt. The most common examples of Secured Debt are home mortgages and car loans.
A Chapter 13 Debtor has a different set of options at his disposal, depending on whether or not the collateral is personal property (i.e. vehicles, mobile homes, etc.) or real estate property.
A Secured Creditor whose collateral is personal property (i.e. a vehicle) can be dealt with in four different ways:
- If you are behind in your payments, or simply no longer want to keep the vehicle, you can simply Surrender the vehicle to the Secured Creditor. This option is also available if the collateral is Real Estate.
- If you are current on your monthly payment obligation and want to keep the vehicle, you can simply continue to make your monthly payments directly to the creditor, commonly referred to as “outside the Plan”. This option is also available if the collateral is Real Estate.
- If you are behind in your monthly payments to the Secured Creditor but still want to keep the vehicle, your past-due payments (the “arrearages”) can be paid to the Secured Creditor from the monthly Plan payment of your “disposable income” that you make to your Chapter 13 Trustee. Your future payments (i.e. those due after the bankruptcy filing) are paid directly to the creditor outside the Plan. When the Chapter 13 case is concluded your pre-filing debts will have been paid in full, from the Trustee’s payments to the Secured Creditor, and you remain obligated to make all future payments as they fall due. Usually there are no remaining “future payments” when the collateral is a vehicle, because the term of the car loan will have ended before the Chapter 13 is concluded. However, when the collateral is a mobile home or real estate, the mortgage may have many years left to go when the Chapter 13 plan is concluded.
- The fourth option (and the most controversial one) is commonly referred to as “Cram Down” and/or “Strip Down.” This option can be employed when the collateral is worth less than the amount owed (commonly referred to as “being upside down”) or when the number of payments left on the debt is less than the length of the Chapter 13 Plan. The interest rate being charged by the Secured Creditor can also be reduced in a Cram Down. See our section on Cram Down/Strip Down for more information.