Secured debts are those where the creditor has a security interest in property. Normally, a security interest is obtained in writing, such as a deed of trust on a home, or by taking a lien against a car title. Sometimes, security interests arise when a seller finances the item, such as a jewelry purchased at a store where the borrower signs a security agreement.
In bankruptcy, a debtor’s options with regard to secured debt depends on whether the bankruptcy is Chapter 7 or Chapter 13.
Chapter 7 bankruptcy: A debtor generally has three options on secured debts in bankruptcy: reaffirmation, redemption, or surrender. The most common examples of secured debts are home mortgage loans and automobile loans.
Chapter 13 bankruptcy: A debtor generally has the option of keeping the property and paying for it according to the contract. If he is behind, he may want to maintain and cure. This means provide for the amount that is behind before the case is filed (pre-petition arrearage) to be paid as part of the chapter 13 plan payment but maintain the ongoing regular payment under the contract. Some secured debt is allowed to be dealt with by placing either the full amount owed or possibly the value of the secured item entirely into the plan with interest. In Chapter 13, the debtor is usually permitted to surrender secured property if it is not needed.
Loans secured by household goods — in both chapters, if a debtor has given a lien against household goods that he owned at the time of the loan, to secure the loan, this may be a voidable lien. A motion is filed, which if it meets the Bankruptcy Code guidelines, will be granted by the Court removing the lien and allowing the loan to be paid along with other unsecured creditors.
Keeping Property that is not necessary – if a debtor attempts to keep property that is not reasonable and necessary for his support, in either chapter of bankruptcy, this can create problems. The idea is: if a debtor can pay for property that is not needed, he can pay back some or all of the debt.