What is a Secured Debt?
A secured debt is backed by personal or real property owned by the debtor. The creditor is given the right to take possession of the property in the event of a default on the loan. This secured property is commonly known as collateral. Often, the collateral will be the item for which the loan is given. (To make things even more complicated this is then called a Purchase Money Security Interest or short PMSI. This even causes every so often problems even for attorneys. When a collateral is given as security for a loan and the loan is not used to purchase the collateral, for example a title loan where the person has already the car, then it is called a Non Purchase Money Security Interest) A house and land may be the collateral for a mortgage loan, or a car may be the collateral for a car loan.
Bankruptcy law recognizes two types of secured debts. Debts initiated by or agreed to by the debtor are called security interests. Debts that are created without the consent of the debtor, such as liens against property filed by the IRS, are called non-consensual liens.
What is a Perfected Interest?
In order for a security interest to qualify as a secured debt under bankruptcy rules, it must be perfected. This means it must be recorded with the relevant state or local agency. A car loan, for example, would usually be recorded with a state agency (in Missouri it is the Missouri Department of Revenue and the notice of lien must be received within 30 days of the date of the loan), while a home loan would be recorded at a county office. Other examples of perfectible security interests include home equity loans and loans for business equipment.
What Loans are Usually Not Security Interests?
Personal loans, sometimes called signature or payday loans, that are not backed by any collateral are not security interests. Purchases with credit cards are normally not secured. However, store charge cards might be secured. Often the card agreement you sign with JC Penny, Target, Walmart, Lowes, or Home Depot, have the agreement that any items purchased are security for the credit balance on your account. In order to avoid a security interest, it might be better to purchase items with a regular credit card than with a store card. Such a lien is perfected with paying, signing the receipt and receiving the item.
Taxing authorities have the right to create liens on your property to recover owed taxes. The IRS files a Notice of Federal Tax Lien to put other creditors on notice of the lien. The lien is created by simply assessing your liability and sending you a bill explaining how much you owe, this is the notice and demand or payments. If that bill is not paid, the IRS has a lien.
A statutory lien is created automatically when certain services are performed. If a mechanic repairs your car or a contractor remodels your house, a lien may exist by statute.
A judgment lien may be imposed if someone wins a court case, or judgment, against you. The laws regarding these liens vary by state. In some states the lien is automatically instituted when the judgment is awarded. In others, the creditor must file with the appropriate agency or government office.
This type of lien will only apply to real property in the county in which the judgment was entered unless it is recorded by the creditor in another county. The creditor may also be able to get a judgment lien against vehicles that you own.
An execution lien is one that is automatically in force when a creditor is granted a writ of execution. A writ of execution authorizes the creditor to direct a sheriff to physically seize the property of the debtor and liquidate it to pay the debt. The regulations for this type of lien also vary from state to state.
How are Secured Loans Treated in Chapter Seven Bankruptcy?
Owners of secured loans have priority in a Chapter Seven bankruptcy. If the trustee sells property that was collateral for a secured loan, the money from the sale will go to that loan exclusively up to the amount of the loan. Unsecured debt creditors will receive funds after secured loans have been paid to the extent possible.
Another difference is that once the bankruptcy is discharged, the unsecured debts disappear. Creditors with secured debts may have the debt itself wiped out, but they still have the lien. Normally, secured creditors are being paid in full during the bankruptcy. By paying the debt to a secured creditor, the lien is satisfied and must be released. Claims of secured creditors can be modified in chapter 13. A mortgage loan cannot be modified. The debtor is allowed however to pay the arrearage (late payments) over a specific time period, in Missouri 4 years, in Illinois up to 5 years. Secured loans on personal property, such as vehicles, jewelry, or household items can be modified. If the vehicle was purchased within 910 days before filing, the debtor must pay only the value of the vehicle and not the loan balance. If personal property was purchased more than 1 year before filing, the debtor can also “cram down” the loan balance to the value of the property. The remaining loan balance can be stretched out over the length of the plan, most often over a time period of 5 years.