Secured Debt in Arizona Bankruptcy
Secured Debt In Bankruptcy
The overhaul of the U.S. Bankruptcy laws in 2005 significantly impacted the way secured debt is handled in a bankruptcy proceeding. Those changes were to the great benefit of debtors, our clients. Secured debt is a loan where you have pledged an asset (most commonly a car or a house) as collateral. In the event you do not repay the loan, the creditor has the right to take possession of the property, sell it, and recover what money it can from the sale.
Prior to 2005, as a practical matter, there was little you could do to change the terms of a secured loan. Now the bankruptcy laws offer relief from the problems posed by secured debts during bankruptcy. As I have written about in earlier articles, in general the bankruptcy laws divide your debts into three primary categories: priority, secured, and unsecured. Priority debts include taxes owed, spousal support, and child support. Unsecured debts include such things as medical bills and credit card debt.
An important concept when it comes to secured debt during the bankruptcy process is the “allowed secure claim.” Let’s take an example of a car loan from a bank. If you currently owe $10,000 on a car, but the car is only valued at $8,000. The bank’s allowed secure claim will be $8,000. The other $2,000 will be categorized as an allowed unsecured claim and would be paid along with all the other unsecured debts. Essential the debt is being split into two parts.
The value of the property is based on the replacement value as of the date of filing your bankruptcy petition, without deducting any costs for selling or marketing the property. If the property is personal, family, or household property, the replacement value is the price a retail merchant would charge for the same kind of item taking into consideration the age and condition of the property.
The reason for this kind of change with regard to secured loans on property is so that the bankruptcy laws reflect the actuals rights of each party. A creditor would not get more than the value of the property. Using our previous example, if you default on a car loan and the car would get the creditor $8,000 after being repossessed and sold, the creditor has the right to a secured claim of $8,000 in the bankruptcy process. The other $2,000 would get lumped into all the other unsecured claims. This prevents a secured creditor from having an unfair advantage in the bankruptcy process. If the laws allowed a secured creditor to get more, then it would mean that the secured creditor has a right to other property beyond that used as collateral for the original car loan.
There are some limitations that have been placed on splitting a secured loan into two parts by the Supreme Court in a chapter 7 bankruptcy. However, in a chapter 13 bankruptcy (and other chapters) the ability to split into an allowed secured and allowed unsecured claims is important for many of our clients.
How is an allowed secured claim determined?
After filing your bankruptcy petition, the trustee will notify all of your creditors. Creditors are given a set period of time to file claims. If a creditor doesn’t file a claim, you can file one on their behalf to ensure the debt is included in the bankruptcy process. You have the right to file the amounts or portions of the debt that are secured and unsecured. No matter who files the claim, you as the debtor or your creditor, there is an opportunity to dispute the value of the property used as collateral for the loan in question. If you no longer have the property because it was lost, stolen, or transferred, the creditor does not have a secured claim.
A creditor is required to provide evidence of their interest in the property used as collateral. To be safe, we may file a motion to object to the creditors secured claim to ensure the court specifically determines the value of the secured claim and the creditor has been notified that the court will determine the value.
Sometimes the date the property is valued becomes important. For example, cars will often depreciate in value quickly, or in a volatile real estate market, values could change rapidly as well. For personal, family or household property, the value is determined based on the age and condition at the time of valuation (as opposed to date of filing).
Sometimes creditors will try to use the bankruptcy court to reclaim the property by having the trustee abandon the property. Creditors may try to convince the trustee that you do not have any equity in the secured property that you have claimed exempt. It may be that the property doesn’t have monetary value for the trustee, but that it is necessary for you to complete your chapter 13 plan. Typically abandonment happens after the end of the case unless there is notice and hearing in front of the court.
There are times when it may be to your advantage for the trustee to “dispose” or sell property. We have clients who will be facing foreclosure on their home even though they are going through bankruptcy to get their financial life back on track. If there will be foreclosure, having the trustee sell the property can sometimes avoid capital gains taxes. If the trustee sells the property the bankruptcy estate will have to pay the taxes as opposed to you paying them. As your attorneys we will review the specific circumstances regarding your property in order to serve your best interests.
I’ve discussed in earlier articles the requirement in a chapter 7 bankruptcy for providing a statement of intention with regard to property used as collateral. In general, you decide whether or not you will keep or give up the property and whether it is exempt or non-exempt. The other decision you make is whether or not you intend to reaffirm the debt. Some lenders will agree to let you continue to make payments on the loan and keep the property without having to reaffirm the debt.
The deadline to file this statement is the earliest of 30 days after filing or by the time of the meeting of creditors. If you are leasing property, such as a car, you will also include a statement as to what you intend to do with the leased personal property. The statement of intention is given to the trustee and all of the creditors listed in the statement. If there is a need to change your plans about the property listed in your statement of intention, we can discuss your options. As a statement of your intent, you are not necessarily bound by what you originally submitted and we can discuss the best options for you with regard to property that is used as collateral.
In the next article I will continue discussing property that is used as collateral, including redemption, continuing to make payments, and the chapter 13 “cramdown.”