What Happens to Secured and Unsecured Debts in Bankruptcy?

by Donald A. Hayes, Attorney at Law


When I receive a phone call from someone seeking information concerning the Bankruptcy process the conversation goes something like this. Have you ever filed before, are you in trouble with a home loan, income taxes, a lawsuit, a garnishment, or credit cards? Do you have any equity in your house, do you own any other real estate, and what are your assets? These basic questions tell me a lot about what type of bankruptcy I think you can benefit from most. A Chapter 7 bankruptcy will enable you to discharge all of your secured and unsecured debts with certain exceptions. Personal lines of credit, lawsuits and most all credit cards are unsecured debts which are dischargeable, unless they fall into one of the exceptions to the dischargeability rules.   Those rules and their exceptions are too complex to explore at one time in this article. Secured debts are debts for which some collateral security has been pledged or given to secure the debt. They range from home mortgage instruments, judicial liens, administrative tax liens, statutory liens, consensual liens on automobiles, appliances, etc. When you file Chapter 7 you are given the option of paying nothing to the secured creditor, reaffirming for the fair market value of the collateral, or redeeming the collateral with a lump sum cash payment. For example, if you want to keep your car you will offer to reaffirm that debt by signing a reaffirmation agreement prepared by the secured creditor. Once this is signed it is filed with the court. You will continue making all monthly payments as usual and nothing will change. You may latter change your mind and decide you do not wish to reaffirm by sending a notice of rescission to the secured creditor at any time prior to your discharge notice is mailed to you, or 60 days after the agreement has been filed with the court, whichever is later. In this event you would make arrangements to surrender your vehicle to the local dealer and owe nothing.

If you wish to reaffirm secured merchandise such as appliances, computers, television sets etc. you are only obligated to reaffirm for their Afair market value@ which in many cases is less than what you owe on the property! The term Afair market value@ is the value the collateral would have if sold at a garage sale or distress sale. As you know, property sold at a garage sale brings a small fraction of its original cost. The secured creditor is more than willing to negotiate with me on behalf of the client because they do not want to take the property back. They would have the burden of selling used merchandise and paying an auctioneer and other costs of overhead. With this in mind they are very flexible. Take for example a 100 MHZ Pentium computer which may have cost $1,800 one year ago. You bought it with no payments due for 12 months and no accrued interest. Now one year later the 233 MHZ Pentium with more bells and whistles costs $1,800. You are in a very good position to reaffirm this debt for much less than you owe. Your computer is now used merchandise and it is the older version technology. We will be able to negotiate down from $1,800 to perhaps $1,000 or less. And this savings will help you pay for the legal fees for your bankruptcy!