Bankruptcy can be your last resort when your personal debt levels are out of control. When you file for bankruptcy, an automatic stay will temporarily protect you from collection activity. If the entire process goes well, the courts will eventually discharge the remaining balance on your unsecured debts.
However, your secured debts are not eligible for a discharge regardless of what kind of bankruptcy you file. What happens to secured debts in a successful bankruptcy filing?
You have the ultimate decision about your secured debts
The primary difference between an unsecured debt and a secured debt is collateral property. A mortgage is a massive loan that certain lenders happily offer because the property that someone purchases serves as the collateral or security for the money they lend. If someone defaults on a mortgage, the lender can foreclose on the property and reclaim the home even if the homeowner had made two decades of on-time payments before.
While the collateral property, like a vehicle or a piece of real estate, may be valuable to you, the lender also has a vested, legal interest in the property. In a bankruptcy filing, the courts can’t just discharge your secured debts because that would create hardship for the companies that offer secured financing. Instead, you have to make the ultimate decision about what happens to those debts.
What are the choices for your secured debt?
When you file for bankruptcy, there are typically three ways to handle a secured debt. The first is to reaffirm the debt. This involves going to the lender and agreeing to the same terms as before to keep the collateral property and loan despite the bankruptcy.
The second option is more common in Chapter 13 bankruptcy, but it may still be an option in a Chapter 7 filing. It involves a borrower negotiating with their lender for more favorable terms on a loan. The third option is to relinquish the collateral property and terminate the loan.
How long you have made payments on the property and any secondary investments you have made in the property used to secure a loan may influence what approach you take in a bankruptcy filing. Knowing all of your options can help you maximize the benefits you derive from a bankruptcy.