What happens to the furniture, computer and such that you owe money on? Can they be protected under both Chapters?
When a client comes into our offices worried about collateral on a debt, it’s almost always about their home and/or vehicle. And so the decision about whether to file a Chapter 7 “straight bankruptcy” or instead a Chapter 13 “adjustment of debts” often turns on which is better for their home and/or vehicle. That decision is seldom driven by how other collateral is affected, which is candidly why you see much less information about this on bankruptcy attorney websites. Let’s fix that shortcoming right here with these next two blog.
Types of Debt with Other Collateral
There’s a wide world of possible debts with other kinds of collateral—everything from business loans secured by inventory to income taxes with a tax lien on every shred of possessions you own. Many of those unusual kinds of secured debts operate by special rules, so we could easily write an entire blog on each of those kinds of special secured debts.
But for this blog we’re focusing on the most common non-home/non-vehicle type of collateral, which is tangible personal property such as furniture, appliances, TVs and electronics.
You can have a debt with this kind of collateral one of two ways. The first happens when the debt was entered into in order to buy the collateral. This can be with a bank or store credit card, a line of credit with the store, or a separate contract. The second happens when you already own something and provide it as collateral on a debt, such as with a loan for money from a small loan lender. Today’s blog is about the first kind—“purchase money” secured debt. The next blog will be about the second kind—“non-purchase money” secured debt.
Is the Collateral Really Collateral
Whether you are in a Chapter 7 or Chapter 13 case, the threshold question is whether the furniture or computer (or whatever else) is really collateral on the debt related to the purchase. In other words, does the creditor have a legal right to repossess the furniture or computer or whatever you bought?
The answer to that generally turns on the terms of the contract that governs the transaction. Just because you owe money for the purchase of something, that alone usually does not give the creditor the right to repossess it. If you did not grant the creditor that right within the contract (which you may or may not know you did), the debt is likely just an unsecured debt. The debt could be discharged (written off) in bankruptcy without the creditor being able to make any claim on the furniture or whatever you bought.
There’s often much more to this secured/not-secured issue. For example, the contract for a revolving account terms could make the items purchased collateral on the debt, BUT you may have already made enough payments so that something purchased a while ago is no longer collateral on the debt. So this question about whether the things you purchased are collateral or not is clearly one that you need to discuss with your attorney.
Will the Rights to the Collateral Be Enforced?
If the furniture or other item purchased is determined to be legally collateral on a debt, the next question is whether the creditor will bother to assert its rights to that collateral. Sometimes it’s just not worth for them to enforce their contractual rights. There is a tendency not to when the collateral has depreciated so much that it literally costs them more to take it back and sell it than how much the proceeds of sale would likely be. Also, creditors change their collection policies over time, especially after being bought out by other companies.
The contract will only tell you what the creditor’s rights are, not whether it is enforcing them. That’s something only a highly experienced bankruptcy attorney would likely know.
Purchase Money Secured Debt in Chapter 7
Assuming that the collateral IS legally tied to the debt, and the creditor IS enforcing its rights, your options in a Chapter 7 case are:
- If you want to keep the collateral, enter into a “reaffirmation agreement” with the creditor, a commitment to continue to be liable on either a portion of or the entire debt in spite of your bankruptcy, in return for your right to keep the collateral.
- If you want to keep the collateral but don’t want to reaffirm all or part of your legal liability, you could continue making payments until either the collateral was paid for or you surrendered the collateral. The advantage of this is that if you ever do surrender it, you would owe no potential “deficiency balance”—debt beyond the value of the collateral. The potential disadvantage is that sometimes you run the risk of repossession for not reaffirming.
- If you want to keep the collateral, “redeem” the collateral by paying no more than its fair market value in a lump sum.
- Surrender the collateral to the creditor if you don’t want it, and discharge the debt.
Purchase Money Secured Debt in Chapter 13
- If you want to keep the collateral, and you bought it at least a year ago, simply arrange in your Chapter 13 plan to pay off the lesser of the fair market value of the collateral or the loan balance. If you bought the collateral less than a year ago, you’ll have to pay the full loan balance. Either way, at the completion of your case you would owe nothing more to the creditor and would own the collateral free and clear.
- If you want to surrender the collateral, you may end up paying something to the creditor if it claims you owe a deficiency balance, but that unsecured debt would just go into the pool of your other unsecured debt, usually just reducing what the other creditors would receive, without increasing what you have to pay.
