SECURED DEBT: CHOICES IN BANKRUPTCY

2007-03-08 10:33:40

( Financial )



Secured debt is a debt guaranteed by a mortgage or a pledge of collateral. It is a debt where the creditor has a lien on the property put as collateral which he can foreclose or repossess when borrower cannot meet loan payments.

Under the Chapter 7 of the Bankruptcy Code of the United States, debtors are required to give the collateral to the trustee when they file for bankruptcy. Such property is sold by the trustees and proceeds are distributed to the creditors.

Personal Obligation or Security Interest

Secured debt in bankruptcy is either personal obligation or security interest. Personal obligation on secured debt is the obligation of the borrower to pay and keep the collateral insured. The security interest allows the creditor to foreclose the collateral when the debtor does not comply with his personal obligation on the property put as collateral.

Borrowers filing for bankruptcy, however, have choices to redeem, reaffirm or surrender their properties put as collateral for secured debt.

Redeem

They can redeem the property by paying single cash payment to the creditor for the present value of the property put as collateral. The property will be free from secured debt, meaning, it is not anymore considered as collateral for your debt obligation. The balance of your debt will now be considered as unsecured debt which can qualify for discharge under the bankruptcy code.

Reaffirm

Borrowers can reaffirm the property put as collateral wherein they create an agreement with their creditors to waive the discharge on the secured debt and instead pay the debt based on its original contract. It is legally binding and will be enforced by creditor when you do not pay the terms of the loan contract. The creditors will then retain the secured interest in the property until you repay the loan in full.

Surrender

Borrowers can surrender the property they put up as collateral for the loan. This makes the loan an unsecured debt which can qualify for discharge as stated in the bankruptcy code. The creditor will now sell the surrendered property to recover the money they have loaned to the borrower. The bankruptcy discharges the balance of the loan if the amount of the sell of the asset is lower than total value of the loan.

Borrowers filing for bankruptcy should consider these choices carefully prior to making any agreements. They should consult with a bankruptcy expert to guide them on what choice best server their interest.


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