Two Kinds of Creditors: Secured + Unsecured
Creditors are divided into two types: Secured and unsecured. Each is treated differently in a bankruptcy case. Every creditor, secured or unsecured, is notified by the bankruptcy clerk by mail of the case being filed with a “Notice of Commencement”, outlining their various rights and advising that Relief Has Been Ordered and that the Automatic Stay is in effect, which prohibits them from contacting the debtor in any fashion.
As an experienced Ft. Lauderdale bankruptcy attorney dealing with these matters daily, I offer the following summary.
Secured creditors (Schedule D in a bankruptcy petition) are protected in a bankruptcy case. Secured means that particular lender or creditor (“lender” here being used interchangeably with “creditor”) by contract has a security interest in specific collateral, which protects their interest. These are most commonly a mortgage on a homestead or other real property, or an auto loan. In a bankruptcy case, you can opt to retain the real property or auto, but the obligation to continue paying on the loan is uneffected by the bankruptcy case. Which is simply to say, the lender on a secured debt can in due course, despite the bankruptcy case, still foreclose or repossess the auto.
Indeed, a bankruptcy petition contains a dedicated Schedule (fancy bankruptcy parlance for a page of the petition) entitled “Statement of Intention”. On this Statement of Intention Schedule each secured creditor is listed and an indication is made as to whether the debtor intends to either 1.) Retain the asset (home or auto) - or - 2.) Surrender the asset back to the lender.
Although beyond the scope of this article, secured creditors generally require debtors who wish to retain the asset and reaffirm the debt to sign a Reaffirmation Agreement, which is filed with the bankruptcy clerk and the court, which acts to in essence remove the asset and debt from the case and the debtor remains obligated despite the bankruptcy case. There is a brief time period in which the debtor can rescind the Reaffirmation Agreement if they change their mind after signing.
It should also be noted that if the asset is surrendered back to the lender, the loan then becomes unsecured (the creditor no longer has collateral) and the debt then becomes fully dischargeable as an unsecured debt (see below). That is to say, if the debtor chooses to surrender the asset back to the lender, the creditor cannot then later come after the debtor for a deficiency claim, as the creditor otherwise could do without a bankruptcy filing. A deficiency claim by example is the difference between the proceeds the repossessed auto fetched at auction versus the total amount still due on the loan.
Unsecured creditors (Schedule F of a bankruptcy petition) comprises creditors who have no collateral securing their loan. These are typically credit cards and medical bills or payday loans and the like. These debts, almost without limit as to amounts or other qualification, are 100%, fully dischargeable to the last penny is a chapter 7 filing. In my experience as a Ft. Lauderdale bankruptcy attorney, these debts usually comprise the bulk of a client’s debt are are usually the main reason for filing: Too much debt!
Lastly, I would mention the possibility of “cross-collateralization”. This happens when a person has a deposit account with a certain bank and also a credit card or line of credit or auto loan with the same bank. The find print on the account agreement might provide that the customer pledges or otherwise agrees the deposit account shall act as collateral (security) for the credit card or loan. It may allow the bank to seize funds in the deposit account if the customer defaults on the credit card or loan. This almost is always present with a credit union. This information should be ascertained before defaulting or filing a bankruptcy and the simple answer is to close any deposit account before defaulting or filing.
If you are overwhelmed by debt you may well be able to just get rid of it by filing chapter 7 bankruptcy. As a South Florida bankruptcy attorney I offer my services to help you navigate the system, to get a fresh financial start and to have a life again!