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Can bankruptcy wipe away secured debt?

Not all debt is created equal. Some debt is secured; others are not. That distinction can have important ramifications for Tennesseans considering whether to file for bankruptcy. To learn more about how bankruptcy handles secured debt, whether filed under Chapter 7 or Chapter 13, keep reading.

But, before we do, let's begin by explaining what secured debt is. In brief, secured debt is when a lender loans money in exchange for both a promise to pay and an interest in some other form of property. The best known type of secured loan is probably a home loan. A bank loans a person money to buy a home, then the person, in turn, signs a mortgage that allows the bank to take back the home if the person does not make their payments. The mortgage itself is known as security.

Turning to a bankruptcy proceeding, as soon as someone files for bankruptcy, the court will issue an automatic stay. This stay puts a creditor's collection efforts to a screeching halt - at least temporarily. This includes the circumstance where a creditor is trying to foreclose on property. But, because creditors have an interest in the property, bankruptcy law protects them if a debtor wants to use, sell or lease the property during the bankruptcy. For example, the court may require the debtor to pay the creditor periodically. Or, it may place a lien on other property. Or, it may choose to do nothing - usually because the property's value far exceeds the debt.

Not all creditors will enjoy these forms of protection. If the debt is greater than the property value, the creditor usually will not receive protection unless they can show that the property is losing value during the bankruptcy. If, on the other hand, the debt is less than the property value, the creditor will normally receive protection.

Creditor protection is just one of many issues that Tennesseans may need to wade through during the bankruptcy process. To learn more about the process, those in debt may benefit from speaking with an experienced bankruptcy attorney.

Source: FindLaw, "Bankruptcy and the Secured Creditor," Accessed Nov. 13, 2016

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Mark T. Young & Associates
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Hixson, TN 37343

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