Secured debt can sound like a foreign term for a lot of people, but it is in fact quite a simple concept. A secured debt simply means your loan or line of credit is attached to some form of property or asset. Secured debts are commonly used for your home (ie mortgage or home equity line of credit), car and equipment loans, or there are even secured credit cards, where the line of credit is attached to funds already deposited.
For a debt to be secured, the creditor must follow specific processes for attachment and perfection under the Uniform Commercial Code and state laws. What this means, is that most debts are not secured to anything, so creditors must go after you personally to be paid, instead of repossessing the collateral (property) secured to the loan. Suppose you use a Home Depot credit card to purchase a new lawnmower, or a Guitar Center credit card to purchase a new instrument; most of these store credit cards do not take a security interest in the property you purchase with them. There are exceptions, such as rent-to-own contracts, but the majority of individual debts out there are not attached to any property.
This is relevant because a bankruptcy filing removes your personal liability to pay debts, and therefore you would not have to return your new guitar to Guitar Center or mower to Home Depot if you discharge those debts in a bankruptcy filing. Unless the store/vendor/creditor can prove their debt is secured or attached to your property, the normal bankruptcy exemptions apply and we can protect it as if it were paid off.
However if a debt is secured to property, then you must keep making payments on the debt or else the creditor may repossess their collateral. So if you want to keep your car or home during a bankruptcy, you almost always can, but you have to keep making the payments on the debt. The best way to know if a debt is secured or not is to read your contract or ask your lender. However, if you are contemplating a bankruptcy filing, you may not want to call your lender, as you would be better off talking with an experienced bankruptcy attorney before contacting your creditors.
When ready, reach out to Kain & Scott at www.kainscott.com.
