happens to items used as collateral for a loan?
If at the time you took out a loan from a creditor, you
signed an agreement with that creditor pledging certain items
of your property as security for that loan, that creditor has
a security interest in that property, which is known as the
secured property or the collateral for that loan. For example,
your car is generally collateral for your car loan, and you
may have pledged your stereo or household goods as collateral
for a loan with a finance company such as ITT or Beneficial.
Similarly, for some store charge cards such as Best Buy, the
merchandise purchased from that store may be security for the
amount owed on that store charge account. While bankruptcy
generally discharges the debt owed to a creditor, bankruptcy
generally cannot void that creditors valid security interest
on the collateral. That means that the creditor continues to
have a lien on and can eventually repossess its secured
property unless other arrangements are made.
bankruptcy trustee has no interest in liquidating the security
held by the creditor(s), what happens with the
collateral is chiefly between you and the creditor.
following question for the exception.) In a Chapter 7
bankruptcy, secured property (collateral for a debt) is
handled in one of the following ways:
property is given back to the creditor;
Arrangements are made to continue to pay the creditor in order
to keep the secured property (as is often done on car loans);
3) The debt
is formally reaffirmed in writing, which legally obligates you
to continue to make payments on that debt; or; Arrangements
are made to buy the secured property from the creditor for the
present value of that secured property. In a Chapter 12 or
Chapter 13 bankruptcy, arrangements for buying back the
secured property from the creditor or surrendering property to
a secured creditor may be an integral part of the bankruptcy.
This often allows you to buy back secured property from the
secured creditor for the value of that property (with
interest), with the payments for that property to be made to
the Chapter 13 Trustee over 36-60 months.
secured debts (like your house), you may simply continue to
make the normal monthly payments. Can I continue to pay some
of my creditors even after a Chapter 7 bankruptcy? If you
wish, you can make voluntary payments on debts discharged in
bankruptcy, but creditors cannot require any additional
payments on discharged debts unless you formally reaffirm the
debt in writing.