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Chicago Bankruptcy Question: What is a secured creditor in a Chapter 7 and how are they treated?

Chicago Bankruptcy Question of the Day: What is a secured creditor in a Chapter 7 and how are they treated?  A secured creditor is a creditor to whom a debt is owed and some form of collateral was either pledged against that debt or the creditor was able to obtain a lien against some collateral.  The most common forms of secured creditors are mortgages and home equity lines of credit, financed  motor vehicles and financed furniture.  Other types of secured creditors include judgment lien creditors, where the creditor obtained a court judgment against the person and had the lien attached to the person's property, non-purchase money creditors, where a person pledged property that they already owned against a debt, and tax liens, where tax debts are attached to the person's property by operation of law.

In a Chapter 7 bankruptcy, there are several ways to treat secured creditors.  The first, and frankly the easiest, is to surrender the property to the creditor.  When property is surrendered, the creditor is allowed to take possession of the property, sell it and apply the proceeds of the sale to the outstanding debt.  Any remaining debt, termed a "deficiency balance", is then discharged in the Chapter 7 bankruptcy. 

Most people who file for Chapter 7 bankruptcy in Chicago, however, want to keep some or all of their property secured by a creditor.  In those cases, there are three options.  First, the filer can reaffirm the debt.  This means that the filer re-assumes personal liability on the debt, maintains their regular payments and the debt survives the bankruptcy.  Reaffirmation is most commonly done with financed motor vehicles.  Second, the filer can redeem the property.  This means that the filer pays the current market value of the property to the creditor and the creditor releases the lien on the property.  Again, this is most common with financed motor vehicles.  Third, the filer can simply maintain payments on the debt and the keep the collateral.  Their personal liability on the debt is discharged in the Chapter 7 bankruptcy, but the lien remains against the property, so the payments must be maintained in order to keep the property.  This is very common with mortgages when the filer is "underwater" on the home.  This is a risky proposition with financed vehicles, as the creditor may elect to execute their right to repossess the vehicle, even if the filer is current, because of the bankruptcy discharge of personal liability.

Some liens can be avoided, also known as "stripped off", in a Chapter 7 bankruptcy.  Before you consider it, second mortgages and home equity lines of credit cannot be stripped off in a Chapter 7 in Chicago.  For that, you would have to file for Chapter 13 bankruptcy protection.  Neither can properly executed tax liens.  With that said, it is very common to strip off a judgment lien from a filer's residence if the equity calculations allow for such an action.  Non-purchase money debts can be stripped off of the collateral as well, so long as the collateral is exempt and consists of household goods "necessary for the debtor's effective reorganization".

If you have secured debts and are considering filing for Chapter 7 bankruptcy protection in the Chicago area, it is essential that you have a quality bankruptcy attorney representing.  An experienced bankruptcy lawyer will be able to fully advise you of your options regarding your secured debts and advise you as to the risks, consequences and most favorable course of action.  The experienced bankruptcy attorneys and Ledford & Wu will gladly provide you with a free consultation to discuss your options and ensure that your secured creditors are effectively addressed in your Chapter 7 filing.

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