Secured debt is any type of debt which is backed by collateral or something of value which can guarantee the secured lender that the amount of the loan can be repaid or the item of value can be repossessed to pay the loan.
Common secured loans include a home loan and an auto loan. Secured loans generally have lower interest rates for borrowing the funds and allow debtors to pay less in finance charges over the life of the secured loan. Loan agreements outline the terms and conditions of the loan and determine the amount of missed or late payments allowed by the lender before the property is repossessed.
Debtors who file Chapter 7 Bankruptcy have the right to redeem, reaffirm or surrender their secured assets. Redemption allows the debtor to pay the secured creditor the present value of the secured asset. This can be done in a lump sum cash payment. If the payment is made the asset belongs to the debtor. If there is a remaining balance for the loan it is considered unsecured debt and can be discharged in the Chapter 7 Bankruptcy proceeding. Secured debts can also be reaffirmed which means the debtor agrees to pay the loan using the original terms of the initial loan agreement. If the debt is reaffirmed the secured creditor will maintain the security interest in the secured asset until the asset is paid for in full. Surrendering the secured asset is the final option in Chapter 7 Bankruptcy. This allows the secured creditor to sell the asset or property and attempt to recover the loan amount. Unpaid balances not recovered by selling the asset are discharged in the Chapter 7 Bankruptcy proceeding.
Filing Chapter 13 Bankruptcy may allow the debtor to keep the asset or collateral securing the loan, but the Chapter 13 Bankruptcy plan must give the creditor at least the value of the collateral (under some conditions the full secured loan amount must be paid). Some secured debt payments can extend past the 3-5 year repayment schedule (ex. mortgage loan) but the arrearage must be paid during the Chapter 13 Bankruptcy repayment plan.