June 2, 2020

Secured Debt and Bankruptcy

In the most recent post, we discussed medical bills, a type of unsecured debt which can be discharged if you file bankruptcy. In this post, we will discuss secured debts, as people often have questions about the differences between secured and unsecured debt.

Translating legal jargon can be daunting, especially when dealing with the stresses of bankruptcy. Many terms are frequently used but not fully understood by filers. To determine if a debtor is eligible to file for Chapter 13 bankruptcy, they need to know the total amount of the secured debt. Here, I will cover what “secured debt” is, and how to tell if a debt is secured.

Examples of secured debts are home mortgages, home equity lines of credit, and car loans. These secured debts are liens, which means the creditor is secured, and were legally created by an agreement between the debtor and the creditor. Liens determine the rights a creditor may have in the debtor’s property. Here are some less known forms of liens:

Security Interests: A seller is secured when they finance a purchase you make. Credit plans by retailers such as Sears and Good Guys give the seller a security interest in the products purchased, and they have the right to reclaim the goods if you discharge the debt through bankruptcy. In contrast, if you purchase the products using a credit provided by a lender instead of the seller (a credit card) then the products are yours with no security interest in favor of the lender. However, creditors rarely take legal action to repossess the products.

Judgment Liens: A creditor must take an extra step of filing or recording the judgment to create a lien on the judgment debtor’s property. Secured debts are totaled separately from unsecured debts when determining the debtor’s eligibility to file Chapter 13 bankruptcy, so you need to know if judgment liens have been perfected. Laws vary between states so it’s important to check how judgment liens are perfected in your state. For example, in California if a creditor records the judgment then they have a lien on all of the debtor’s property in the county.

Tax Liens: If a tax lien is recorded, then a lien is perfected on all of the taxpayer’s property.

Blanket Security Interests: If you give the lender a security interest in all of your personal property, then the lien “blankets” all of your assets, potentially even including assets acquired after the security interest agreement is signed.

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