Bankruptcy Fundamentals – What is Secured Debt?

A secured debt is one that is secured by property, which the creditor can take if you default. For example, your mortgage is secured by your home. If you default on your loan, the lender can sell your home to repay your debt. A car loan is also a secured debt. In addition to these voluntary security agreements, there are some types of secured debts that you might not have agreed to. For example, if you owe taxes, the IRS might get a tax lien against your home.

When you file for Chapter 7 bankruptcy, your personal liability to repay a secured debt is discharged. However, the creditor still has the right to take back the property securing the debt. For example, if you have defaulted on your mortgage, the lender will still have the right to foreclose on the property and sell it once your bankruptcy case is over. However, if the house is worth less than you owe, the lender won’t be able to sue you for the difference (called a deficiency judgment).

As part of your Chapter 7 paperwork, you will have to tell the court and your creditors how you want to handle your secured debts. The simplest option is simply to give back the property. If you want to keep the property, you will have to reaffirm the debt (agree that you will still owe it after your bankruptcy is over), redeem the property (pay the creditor its fair market value), or, if the creditor agrees, keep the property and continue making payments.