Secured Debt in Bankruptcy

Whether or not a debt can be discharged in bankruptcy will often depend on the priority of the debt. The priority of a debt will depend on whether a debt is a secured or unsecured debt.

A debt is “secured” when it is covered by some type of collateral. For example, John loans Daniel $500. Daniel allows John to hold his ring as collateral. If Daniel does not pay John back by their agreed upon date, then John will keep Daniel’s ring. This is called a “secured transaction.”

Thus, the ring secures John’s loan to Daniel. An unsecured debt refers to a loan that is not secured by some sort of collateral.

Secured debts take priority over unsecured debts and are rarely dischargeable in bankruptcy. Chapter 507 of the U.S. Bankruptcy Codes lists the priority of debts and in what order they must be paid to the creditors.

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Attorney for Unsecured Debt in Dallas, TX

If you are worried that your wages will be garnished because of unpaid IRS debt, or if you have questions regarding the dischargeability of secured debt, contact the bankruptcy attorneys in Dallas, TX, at Littlefield Law Firm to discuss your options.

Find out if you can stop the garnishment action and settle the debt. Contact us to find out whether you can discharge your secured loans in a Texas bankruptcy. Let us put our experience to work for you. Call (972) 812-0900 today.

Our bankruptcy attorneys represent clients in the bankruptcy courts in the Eastern District for the offices in Dallas and the Northern District for the office in Plano, TX.

Call us at (972) 812-0900 to discuss your case.

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Secured Debt in Chapter 7 Bankruptcy

Unlike an unsecured debt that may simply be discharged if an individual successfully completes a chapter 7 bankruptcy, secured debts are typically treated differently. With secured debts, even if the debt is discharged, there is still a lien on the collateral property. A lien is not dischargeable in bankruptcy and is handled separately.

A secured debt has two parts: the personal liability and the lien. The personal liability may be discharged in bankruptcy similar to an unsecured debt. The lien, however, remains. In Chapter 7, the lienholder may be allowed to repossess the property or accept whatever proceeds the property sells for, even if the sale does not cover the debt.

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Secured Debt in Chapter 13

Chapter 13 Bankruptcy is reorganizing debt. In Bankruptcy, the outcome of a secured debt may be different than in Chapter 7. With Chapter 13, most secured claims need to be paid in full with interest. An individual with a secured loan may relinquish the collateral to the creditor, and pay the remainder, if any, in the reorganization plan.

If the debtor chooses to keep the property, then he or she will continue making payments on the property, typically through the Chapter 13 plan. One of the biggest differences between Chapter 13 and Chapter 7 regarding secured debt is that Chapter 13 allows for “cramdown.”

A cramdown occurs when a loan is considered “upside down,” meaning that the balance of the loan exceeds the value of the collateral. Thus, if you owe more on your collateral than its fair market value, the difference between the loan balance and the fair market value can be stripped off or “crammed down.”

A cramdown restructures your loan balance to the amount that is equal in value to the collateral. Not all assets are eligible for cramdown. Mortgages, some leases or vehicles, for example, are not eligible for cramdown.

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Types of Secured Debt

There are multiple types of debts that are considered secured debts. They may be divided between consensual liens and nonconsensual liens. A consensual lien is entered into voluntarily, while a nonconsensual lien is imposed on a person’s property without his or her consent.

Consensual liens include:

  • Purchase Money Security Interest
  • Nonpossessory loans
  • Possessory loans

Nonconsensual liens include:

  • Judicial Liens
  • Tax Liens
  • Statutory Liens

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Additional Resources

The Bankruptcy Basics – visit the United States Courts website to find an article discussing the basics of chapter 13 bankruptcy. The article discusses the background and intent behind Chapter 13 bankruptcy, the advantages, and how to become eligible. Importantly, the article discusses how Chapter 13 deals with secured and unsecured debts.

Secured and Unsecured Debt – Visit the Advantage Credit Blog for more information about the differences between secured and unsecured debt. The article discusses how secured debts are created, the most common type of secured debt and how each type of debt affects you and how it is prioritized.

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Find a Lawyer for Secured Debts in Dallas County, TX

The most important decision your bankruptcy lawyer will help you make whether you should seek to discharge of all of your debts in bankruptcy. An experienced bankruptcy attorney in Dallas, TX, at Littlefield Law Firm can help you determine whether the different types of debts can all be discharged in your Chapter 7 bankruptcy or whether you are better off seeking a Chapter 13 bankruptcy.

Our firm represents clients in bankruptcy court throughout the greater Dallas-Fort Worth area including in the Northern District of Texas at the Earle Cabell Federal Building in Dallas, TX.

Littlefield Law Firm is located in northern Dallas, TX, and we take cases throughout Dallas County, Collin County, Kaufman County, and Rockwall County. Call (972) 812-0900 to learn more about the bankruptcy option that is best for you.

This article was last updated on Thursday, March 22, 2018.

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Linda Littlefield