Tag Archives: Secured Debt

What is the Difference Between Secured and Unsecured Debt in Bankruptcy?

By Ryan C. Wood

What is unsecured debt? An unsecured debt is any debt you have that is not secured by collateral. Some examples include credit card debts, medical debts, personal loans, and deficiencies from repossessed vehicles or foreclosed homes. What is secured debt? A secured debt is a debt that is secured by collateral. The collateral may be recovered by the creditor if you default on the payments. The most common types of secured debts are real estate and vehicles. If you do not pay the debt the creditor can take possession of the collateral such as foreclosure of a home or repossession of a vehicle. Once the collateral has been taken to satisfy the debt any deficiency remaining is considered unsecured debt. Other secured debts include debts incurred to finance the purchase of a television or furniture. If you do not make the payments the television or furniture can be repossessed. Make sure you communicate to your bankruptcy attorney whether you have purchased items on credit like television or mattresses that you are still making payments for.

Why is it important to know the amount of your secured and unsecured debt when filing bankruptcy? There are several reasons. One of the reasons is that your total secured and unsecured debts determine whether you are eligible to be a debtor under Chapter 13 of the bankruptcy code. There are limits on how much secured and unsecured debts you may have. Currently (April 2013), you are not eligible to file a Chapter 13 bankruptcy case if your non-contingent, liquidated secured debt exceeds $1,081,400 or your non-contingent, liquidated unsecured debts exceed $360,475. You therefore need to know exactly how much secured and unsecured debts you have so you know if you are eligible to file a Chapter 13 bankruptcy case. Most bankruptcy lawyers will run your credit to make sure the debts listed in the petition are as accurate as possible, but you may owe money to a business or individual that does not report to the credit bureaus.

Another reason it is important to distinguish between your secured or unsecured debts is that you need to continue making payments on your secured debts if you want to keep the collateral. It does not matter what chapter of bankruptcy you file under. When you file for bankruptcy your underlying debts are discharged, but the debt is still secured to the collateral. If you stop making payments the creditor will have the right to take the collateral back. If you do not want to keep the collateral or if you cannot continue with the payments you can surrender the collateral in your bankruptcy case and the underlying debt may be discharged. Keep in mind, however, that the collateral is still your responsibility until the deed or title is transferred out of your name.

A third reason why it is important to distinguish between secured and unsecured debt is that it may affect your ability to keep your assets. Two examples: (1) In the case of In re Traverse (1st Circuit BAP decision, BAP No. MB12-025, February 4, 2013). In this case the first mortgage was unrecorded and therefore unperfected and unsecured. There was a second lien on the property that was properly recorded. The trustee was able to sell the property right out from under the person filing for bankruptcy for the benefit of the bankruptcy estate and distribute the proceeds to the creditors. If the first mortgage had been properly recorded it would have been a secured debt and the person filing for bankruptcy would have been able to continue living in her home and continue making payments on the home. (2) If you obtain a loan from a private individual to purchase a vehicle and the lender did not properly perfect his or her security interest in the vehicle, that person would be considered an unsecured creditor. If the value of the vehicle is significant enough and you do not have enough exemption room to protect that asset the trustee may potentially liquidate that asset in a Chapter 7 bankruptcy case and distribute the proceeds to the creditors.

Bankruptcy and Secured Debt, In re Welsh and Chapter 13 Bankruptcy

By Ryan C. Wood

A reoccurring issue in Chapter 13 bankruptcy cases is whether you can keep multiple cars, ATVs, or trailers that you are still making payment on. Some of these may be considered “luxury” items, meaning that they are not necessary for you and your family’s maintenance or support. The Ninth Circuit recently decided in the case of In re Welsh (No. 12-60009, 9th Circuit, March 25, 2013) that it would not be considered bad faith to keep making payments on motorcycles, trailers, boats or other motor vehicles and therefore you would be able to keep them. Bankruptcy lawyers can now provide better guidance to clients.

In In re Welsh, Mr. and Mrs. Welsh filed for Chapter 13 bankruptcy. They had income from employment, social security, and a small pension. They were making payments to secured creditors for a house, 3 cars, 2 ATVs, and a trailer. The Trustee objected to the confirmation of the Welshs’ bankruptcy plan based on bad faith for 2 factors: failure to use some of the Social Security Income to pay unsecured creditors and paying secured creditors for what the Trustee deemed to be “luxury” items. The 9th Circuit shot down both of the Trustee’s objections.

Social Security income is excluded from the calculation of income pursuant to 42 U.S.C. §407(a). The Trustee agreed with the fact that the Social Security was correctly excluded from the calculation of income, but he argued that the failure to use any of the Social Security income to pay the unsecured creditors was bad faith. Determining good faith is based on the totality of circumstances. The court stated that Congress enacted the means test to calculate disposable income. Congress explicitly excluded Social Security income from the means test. Therefore, the court was not going to ignore the language Congress enacted and concluded it was not considered bad faith to not using Social Security funds to pay unsecured creditors. Most bankruptcy attorneys have long excluded Social Security funds from the Chapter 13 Statement of Monthly Disposable Income prior to this decision.

The Trustee’s next objection was regarding the payment to secured creditors for what he considered to be “luxury” items. His objection centered around the fact that the secured payments were for luxury items and not considered to be things reasonably necessary to be expended for the maintenance or support of the debtor or a dependent of the debtor pursuant to 11 U.S.C. §1325(A)(i). The court responded by saying that §1325 indicates that what is considered to be reasonably necessary is determined by looking at §707(b)(2). §707(b)(2) does not provide any limits on the secured debt deducted from the currently monthly income. Therefore, if Congress had wanted to limit the kind of secured payments you can make in bankruptcy it would have done so. The court concluded that since there are no such limitations on secured payments it was not considered bad faith for the Mr. and Mrs. Welsh to deduct those payments on the means test as long term secured debts.