Usually, the deal with a secured debt is that your creditor can exercise their legal right to seize its collateral upon your failure to repay it. As such, you may wonder if different rules apply when an ongoing bankruptcy case is at play.  Whether or not you can keep the collateral tied to secured debts, like a home or vehicle, depends on the type of bankruptcy filed, whether or not you are currently making payments, and whether you plan on reaffirming, restructuring, or redeeming the debt. For this, please continue reading to learn whether you can keep the collateral tied to your secured debt even after declaring bankruptcy, and how an experienced Louisville, Kentucky Chapter 7 bankruptcy lawyer at Schwartz Bankruptcy Law Center can help you fight for this.

How Is Secured Debt Typically Handled in a Louisville Bankruptcy Case?

Usually, the automatic stay associated with your Chapter 7 bankruptcy case stops your secured creditors from immediately seizing the collateral. However, they may file a motion with the Kentucky bankruptcy court to lift the automatic stay to recover this collateral. They may especially feel inclined to do this if you were way behind in your repayments before filing for bankruptcy, and if the collateral’s value rapidly declines as your case proceeds.

In Louisville, these cases generally proceed through the United States Bankruptcy Court for the Western District of Kentucky.

If you struggled to meet your loan payments before bankruptcy, and you believe it will be the same afterwards, it may be best to give yourself the financial relief and surrender your collateral at this time.

In most bankruptcy cases, secured creditors will retain lien rights, even after a bankruptcy case is discharged, meaning they may still repossess or foreclose on collateral if loan payments are not maintained. However, bankruptcy allows filers the option to catch up on or restructure debts and eliminate deficient balances, depending on whether or not you file Chapter 7 or Chapter 13.

Secured debts commonly include:

  • Mortgages
  • Car loans
  • Boat or RV loans
  • Motorcycle loans
  • Financed furniture
  • Secured personal loans

In Kentucky bankruptcy cases, creditors are generally permitted to retain lien rights, even if the personal obligation to repay a debt has been discharged by the courts.

Unsecured vs. Secured Debts

  • Secured debt is backed by collateral, and the lender retains the right to repossess the property if payments are not made
  • Unsecured debt is not tied to specific property
  • Common unsecured debts include:
    • Personal loans
    • Medical bills
    • Credit cards
    • Outstanding utilities

What Does the Automatic Stay Do in Bankruptcy

The automatic stay is a protection implemented by the court as soon as someone files for bankruptcy in Louisville. Essentially, the point is to temporarily stop collection efforts during the case, so creditors have an equal footing during the case, while providing relief for the filer. As such, the automatic stay may halt:

  • Collection calls
  • Debt-related lawsuits
  • Wage garnishments
  • Foreclosures
  • Vehicle repossession

However, creditors can ask the bankruptcy court to lift the automatic stay under certain circumstances, including:

  • Payments that are considerably overdue
  • The value of the collateral is decreasing
  • Insurance coverage on the property has lapsed
  • The debtor is unable to meet future payment obligations

How Can I Keep the Collateral Tied to My Secured Debt in Chapter 7 Bankruptcy?

However, you may believe it is financially feasible to pay off your debts while keeping your collateral during your Chapter 7 bankruptcy. If so, you may first consider reaffirming the debt. This means you enter a voluntary agreement with your creditor, where you promise to continue paying a specific debt that would otherwise be discharged in exchange for being able to keep the collateral that would otherwise be repossessed.

If this does not work based on your personal circumstances, you may secondly contemplate redeeming your property. In the context of bankruptcy, this means that you may pay a secured property’s fair market value in a lump sum.

When possible, making secure debt payments current before filing Chapter 7 can help improve your chances of retaining the asset. This is because creditors are less likely to seek repossession or foreclosure when an account is current.

What Does Reaffirming a Debt Mean?

When you reaffirm a debt during bankruptcy, it means:

  • You agree that you will remain legally responsible for the loan
  • The creditor agrees not to repossess the collateral
  • The debt will not be discharged during bankruptcy

While this may allow you to retain collateral and improve your payment history, you will remain personally liable for future missed payments, and the interest rates of the loan will remain unchanged.

What Does It Mean to Redeem Property in Bankruptcy?

Redeeming property during bankruptcy means you essentially pay the secured creditor the current, fair market value of the collateral in one lump-sum payment. This generally makes sense when the property in your possession is worth less than the value of the loan, and the property is essential to your daily life. This option is most commonly used for auto loans.

Can Bankruptcy Exemptions Help Protect My Property?

In Kentucky, certain bankruptcy exemptions may apply to help protect the equity of certain assets. These commonly include:

  • Equity in a primary residence or single motor vehicle
  • Household property
  • Retirement accounts

It’s also important to understand that, in Kentucky, filers may have the option to choose between state and federal exemptions. It should be noted, however, that filers can only utilize one set of exemptions, so working with a Louisville bankruptcy attorney to determine which option is in your best interest is critical.

Can I Keep Secured Property in a Chapter 13 Bankruptcy Case?

Chapter 13 bankruptcy can help individuals keep secured property when they have a reliable income, even if they have fallen behind on payments. As such, rather than liquidating assets immediately to repay creditors, Chapter 13 allows filers to adhere to a court-approved repayment plan that will last three to five years, depending on their circumstances.

When Is Chapter 13 a Better Option?

Chapter 13 may be a better option when:

  • You are behind on a mortgage payment
  • You have nonexempt assets
  • You have a regular, steady income
  • You are worried about losing important assets
  • You need time to cure loan defaults

Chapter 7 may be more appropriate if:

  • Your debts are mostly unsecured
  • Income is limited
  • Retaining the collateral is unrealistic
  • You are looking for a faster debt discharge

What Happens if I Fall Behind on a Chapter 13 Repayment Plan?

In the event you default on your Chapter 13 repayment plan, you can expect:

  • Dismissal of your bankruptcy case
  • Resumed foreclosure activity
  • Debt collection efforts may resume
  • Your vehicle may be repossessed

Contact an Experienced Louisville Bankruptcy Attorney Today

Do not let your legal initiatives stop after reading this blog. The next action you should take is calling us at the Schwartz Bankruptcy Law Center and retaining the services of a skilled Louisville, Kentucky consumer bankruptcy lawyer. Rest assured, we will take the reins from here on out. Contact us today to learn more.