Do I Still Owe My Car Loans And Mortgages (Secured Debts) After Bankruptcy?

By Bruce C. Truesdale, Esq.
Bruce C. Truesdale, P.C.

Well, before I answer that, let’s define a “secured debt.” A secured debt exists when you have given the creditor some collateral for the loan of money. For instance, if you purchase a home, you give the mortgage company a mortgage or a lien on the property you are buying. The property becomes the collateral for the loan of the money to buy it. If you do not make the mortgage payments, the mortgage company will foreclose on the home to recover the home, their collateral.

Likewise, when you purchase a car the finance company takes a “lien” on the car. The title to the car reflects the finance company’s lien or interest in the car. The collateral for the car loan is the car. If you do not pay for the car, the finance company can repossess their collateral, the car.

Here is where it can be confusing. After your bankruptcy case is completed, your personal obligation to pay a debt, even a secured debt, is discharged or canceled. The creditor cannot sue you to collect the now canceled debt.

However, if there is collateral securing the debt, remember the car is the collateral on the car loan or the house is the collateral on the mortgage loan, the creditor can seek to recover their collateral. Even during your bankruptcy case, the creditor can request that the court “lift the stay” or bankruptcy protections you have, to repossess or foreclose on a car or home that you are no longer paying on. Sometimes the creditor will simply wait until your bankruptcy is over before seeking to recover the collateral. Although a creditor cannot sue you if you do not pay the loan, they can take back the collateral or sue for possession of the collateral, i.e, a suit in foreclosure.

To keep property that is collateral for a secured debt, it will be necessary for you to bring your payments current and keep them current after your bankruptcy case is filed as well as after your bankruptcy case concludes. The collateral serves to protect the creditor. So does insurance you are required to maintain on the collateral. The creditor may seek proof that they collateral is adequately insured.

In some instances it may be necessary to “reaffirm” your obligation on a secured debt. Reaffirmation is always optional. I will discuss reaffirmation and some of your other options, such as “redemption” in later posts.

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