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How are secured claims treated in bankruptcy?

Secured claims refers to creditors that still have an interest in property you own.
Secured claims refers to creditors that still have an interest in property you own.

Filing for bankruptcy may offer a fresh start for your finances, but it also comes with its own brand of confusing terminology. One such term, secured claims, refers to creditors that still have an interest in property you own, such as a home on which you're paying a mortgage.

To put it simply, if you still owe money on property — a car, home, jewelry, furniture, watercraft or other items — the creditor (or lender) will have a secured claim when you file for bankruptcy. Terms like "lien" or "security interest" are used to indicate that a creditor has interest in your property. This means that if you file for bankruptcy, there are certain stipulations about secured claims.

Even if you intend to keep your property and it is exempt from being sold during the bankruptcy proceedings (if it is your primary residence, for example) the lender can take the property and sell it to recoup some of the money you owe if you don't keep up with your payments. Keep in mind that some bankruptcy filings, such as Chapter 13, do allow you to restructure payments.

You may also surrender the property, even if the law would otherwise allow you to retain it during bankruptcy. So why would you give it up? If you owe more than the property is worth, or you're not able to afford payments even after your bankruptcy is discharged, you may decide that surrendering is the best option. During bankruptcy, you can surrender property and it can be sold to as much of the debt as possible to the creditor that holds the secured claim against it. If the property is sold for an amount less than what you owe, the creditor will forgive the remainder of the debt [source: McDowell].

If the property is exempt from being sold, you may keep it. In the vast majority of Chapter 7 or Chapter 13 bankruptcies, your home cannot be sold to satisfy creditors because of the Homestead Exemption, a federal bankruptcy code provision that allows homeowners to remain in their homes [source: Bulkat]. But if you don't own your home free and clear, the mortgage lender will have a secured claim. This means that if you want to keep your home, you'll still need to make timely payments or the lender can foreclose on it.

In general, the same holds true for other assets that you still owe money on during bankruptcy proceedings, such as your car. For example, if you owe $12,000 on your car, but it's only worth $9,000, you can opt to surrender the vehicle during the bankruptcy proceedings, as approved by the court. As the holder of a secured claim, the lender may repossess the car and end up selling it for $3,500. The remainder of what you owe — $8,500 — will be discharged during the bankruptcy [source: Bulkat].

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