Personal Bankruptcy Secured Debts in Chapter 7
Dealing with secured debts in Chapter 7 personal bankruptcy cases and filing
Security agreements are not defeated by filing personal bankruptcy. Debtors must make a choice, deciding whether to return collateral and discharge the underlying debt., or keep the property by either of two methods. Through reaffirmation or redemption, personal bankruptcy offers two distinctly different avenues for retaining collateral.
Disposition of collateral in personal bankruptcy
In the event of non-payment of a secured debt while a personal bankruptcy case is pending, the court can and probably will grant a motion to lift the automatic stay. An order to lift the stay grants permission to the named secured creditor to proceed with collection efforts. Only specific property named in the personal bankruptcy estate is subject to the stay.
Many security agreements use what is known as a "dragnet clause". A dragnet clause attempts to include as collateral "all other property owned, real, personal, or mixed, whether listed within this security or not, of every kind now and in the future." Personal bankruptcy courts do not enforce dragnet clauses and will not allow a single appliance dealers to raid the personal bankruptcy estate based on these clauses.
Most secured personal property loans are subject to the Credit Practices Rule established by the Federal Trade Commission. This rules prohibits many lender ploys, such as dragnet net clauses, confessions of judgments, waivers of rights, waivers of personal bankruptcy protection, and waivers of notice. In consumer transactions subject to the Credit Practices Rule, these waivers are unenforceable in personal bankruptcy cases.
Redemption in personal bankruptcy
Redemption pays-off encumbered property within personal bankruptcy estate. According to 11 U.S.C. 722, "an individual debtor may, whether or not the debtor has waived the right to redeem under this section, redeem tangible personal property intended primarily for personal, family, or household use, from a lien securing a dischargeable consumer debt, if such property is exempted under section 522 of this title or has been abandoned under section 554 of this title, by paying the holder of such lien the amount of the allowed secured claim of such holder that is secured by such lien."
A personal bankruptcy trustee may avoid a lien that secures certain property according to 11 U.S.C. 724. If a government authority obtains a tax lien, the trustee can void creditor liens and pay non-dischargeable taxes with proceeds of sale rather than allow secured creditors to repossess property of the personal bankruptcy estate. The disposition of other property is determined by 11 U.S.C. 725. this section requires, after the commencement of a personal bankruptcy case, but before final distribution of property of the personal bankruptcy estate, the trustee, after notice and a hearing, shall dispose of any property in which a credit maintains an interest which is neither redeemed or reaffirmed.