How is Secure Debt Treated in a Bankruptcy?

Secured debt -- obligations protected by collateral or real property -- may not be extinguished during either a Chapter 7 or Chapter 13 filing. The procedure for remediating secured debt obligations range widely based on the type of filing, the state the filing is performed in, the parties involved, and potential legally mitigating circumstances.

In some cases, debtors can benefit from secured debt bankruptcy arrangements. For instance, let's say that you own a car that's worth approximately $6,000 but which has $12,000 worth of debt on it to your lender. You can extinguish the unsecured portion of that debt through a Chapter 7 bankruptcy filing. In addition, you can hand in the car to your lender and get forgiveness on the entire $12,000 lump sum.

Since it's easier to wipe away unsecured debt through bankruptcy, many debtors are tempted to transition secured debts to unsecured debts in preparation for the bankruptcy. For instance, one might be tempted to pay off a number of car payments on a credit card in the hopes that, when the card gets discharged, the car payments will go away as well.

However, creditors aren't likely to take this kind of gerrymandering lying down. And if you get caught moving around monies in such a way as to intentionally deny creditors or prefer some creditors to others in discord with the judgment of your bankruptcy estate's trustee, you can get fined or imprisoned, and your bankruptcy case may be overturned.

What happens if your secured property increases in value subsequent to a bankruptcy ruling? The creditor may or may not be entitled to garnish the interest from your investment. If you own a piece of real estate, for instance, and your property values soar after you've filed for Chapter 13, you may be entitled to keep all or a portion of your profits.

Given that Chapter 7 filings liquidate more personal assets than Chapter 13 filings do, if you want to retain some of your secured personal property, ask your bankruptcy attorney about whether you qualify for Chapter 13 filing. Just make sure you organize a payment plan to keep your secured properties and to simplify your debt management.