What Happens to Secured Debt in Chapter 13 Bankruptcy?

Do you have a mortgage, car loan, or other secured debt? Find out what happens to them in Chapter 13 bankruptcy.

If you have debts secured by property, when you file for Chapter 13 you can give up the property and convert the debt to unsecured claim, or keep the property and continue to make payments on the debt. If you are behind on your payments, you can catch up through your Chapter 13 plan. 

Here are your options and how each one works.

Surrendering Property

If you don’t want to keep property that secures a debt, you can surrender it (return it) to the creditor. The amount you owe to the creditor then becomes unsecured debt, which you pay along with other unsecured debt through your Chapter 13 plan, usually at a large discount. (To learn more about how unsecured debt is paid through the plan, see the articles in The Chapter 13 Repayment Plan.) 

Keeping the Property: Continuing Payments Under the Contract

If you want to keep the property and continue paying the debt as before, you just need to say so in your plan. Your proposed plan will state that you intend to remain current on the contract during the life of the plan. 

Curing Arrearages

If you are behind on your secured debt payments, you can catch up on those payments through your Chapter 13 plan. This means that you can avoid foreclosure or repossession of an automobile.

If You Don’t Complete Your Plan

If you end up not completing your Chapter 13 plan, you can continue to make payments on the secured debt in order to keep the property. Or, if you convert to Chapter 7 bankruptcy, you can use one of the options for secured property available in that type of bankruptcy – surrendering the property, redeeming the property, or reaffirming the debt. (You can learn about these options in Your Property in Chapter 7 Bankruptcy.) 

If the Property is Destroyed 

If something happens to the secured property (for example, it is destroyed in a fire), you will probably be able to amend your Chapter 13 plan to reschedule the debt as unsecured debt.  

Reducing Secured Debt to the Property’s Value (Cramdowns)

If you want to keep the property, and its market value is less than what you owe on the loan, you can reduce the debt to the value of the property. This is called a cramdown. You can’t cram down mortgages on your primary residence and there are time limitations on car and other personal property cramdowns. But overall, this is a powerful remedy. To learn about cramdowns, see the articles in Cramdowns in Chapter 13 Bankruptcy.

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