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.
Whether or not a Chapter 7 Debtor gets to keep their property is determined by:
1) Whether or not the property is exempt—placing it beyond the Chapter 7 Trustee’s grasp.
2) Whether or not a secured creditor has the right to take (i.e. foreclose or repossess) property due to missing a loan payment.
Assuming that the property is exempt, the rights of the secured creditor must then be dealt with.
Outside of bankruptcy, a Secured Creditor can recover its debt by either:
(1) Repossessing the collateral and selling it.
(2) Recovering from the Debtor due to his personal liability on the promissory note.
However, a Chapter 7 Discharge changes this equation somewhat in that it eliminates a debtor’s personal liability on the promissory note, although it does not abolish the creditor’s lien rights to repossess and sell the collateral.
Under BAPCPA (Bankruptcy Abuse Prevention and Consumer Protection Act of 2005), a Chapter 7 Debtor is left with the following options when dealing with personal property such as vehicles:
1. Surrender the vehicle to the secured creditor and obtain a Discharge of your personal liability on the note.
2. Sign a Reaffirmation Agreement with the Secured Creditor, which has the effect of reinstating your personal liability on the debt. This means that if you miss payment at a later date you will still be liable on the debt, and for a resulting deficiency judgment, despite the fact that you filed bankruptcy. Prior to BAPCPA, New York was a “ride through” state, which meant that in order to keep the vehicle after bankruptcy all you had to do was stay current on your payments. However, with the enactment of BAPCPA, the law now appears to be that a Secured Creditor can repossess a vehicle if a Reaffirmation Agreement is not signed and filed, even if the debtor is current in his monthly payments. This is much less favorable treatment than debtors received under the old law (i.e. the Act of 1978), but in many ways the primary benefactor of BAPCPA was the auto financing industry. However, it is critical to note that even under BAPCPA, a debtor who is current on a home mortgage loan does not have to sign a Reaffirmation Agreement. This stringent requirement applies only when the collateral is “personal property”. In New York, a mobile home located on rental property is considered to be “personal property”, so you have to be careful when dealing with this situation.
3. Obtain a Court Order authorizing you to Redeem the vehicle by making a one-time, lump sum payment to the Secured Creditor of the Retail Value of the vehicle. This option is really only helpful if the Retail Value of the vehicle is less than the unpaid balance due on the loan. There are redemption loan financiers who lend money to Chapter 7 debtors to facilitate the redemption of vehicles, although (not surprisingly) the interest rates are somewhat high. These redemption financiers will even let the debtor finance a reasonable legal fee to pay to his attorney to bring on a motion seeking authorization to redeem. Only personal property can be redeemed, meaning that in Chapter 7 you cannot redeem real estate that is worth less than the mortgage lien attached to it.