Secured Property and Bankruptcy

A common misconception, one routinely brought up by clients when interviewing with their bankruptcy attorney for the first time, is that they think they're going to lose all of their property. Whatever the reason the myth originated, it is simply not true in the majority of cases. Most of the time, a debtor will be able to keep their secured property when filing Chapter 7 bankruptcy.

Secured property is that where the creditor has a security interest in certain property such that it cannot be discharged like unsecured debts. This is because their interest is secured by certain collateral. The most common examples of this are with car loans and mortgages. In those situations, the money borrowed by the debtor was secured by collateral, whether it be the car itself of the house that the money was used to purchase.

Now, when you file Chapter 7 bankruptcy, all of your property is included in what is called the Bankruptcy Estate. This estate, administered by the Bankruptcy Trustee, includes all of the debtor's property. The trustee initiates what is best thought of as a liquidation analysis, determining what unprotected assets can be liquidated from the Bankruptcy Estate. The key in this situation is unprotected equity.

Because of certain exemptions under the Bankruptcy Code, and in individual state statutes, equity in property can be protected up to a certain point. If there is any unprotected equity, the trustee may then choose to liquidate that property. But in many situations, especially in this economic climate, there will be no equity in property, especially with house values at the levels they are. The same is true for car values, which depreciate quickly in value but often still have hefty loan balances.

As you can see, most property, in most cases, will be able to be protected in bankruptcy as long as there isn't any substantial unprotected equity. Of course, it is best to consult with your bankruptcy attorney in these matters before proceeding.