Secured Debt

When a lender gives you money for a big purchase — a home, a car, sometimes business equipment — they protect themselves by placing a lien on that property. This makes the debt 'secured.' The property is the collateral: it guarantees the lender that even if you stop paying, they can take the property and sell it to recover what they're owed.

The most common secured debts for individuals are home mortgages and auto loans. Other examples include: tax liens placed by the IRS, mechanic's liens on property, and personal loans where you pledged collateral. The key feature of secured debt is the connection between the debt and a specific piece of property — the 'security interest.'

In bankruptcy, secured debt is treated differently from unsecured debt. The discharge can wipe out your personal obligation to pay a secured debt — but it doesn't automatically remove the lien from the property. This means that even after bankruptcy, if you stop paying your mortgage, the bank can still foreclose on your house (the lien survived). Keeping secured debt means continuing to pay it.

Understanding which of your debts are secured helps you make critical decisions in bankruptcy: which property do you want to keep (and therefore keep paying), and which do you want to surrender? If you want to keep your car, you typically need to either continue paying the loan or reaffirm it. If you surrender the car, your personal liability for the loan is discharged, but the car goes back to the lender.

Chapter 13 offers powerful tools for dealing with secured debt. You can potentially reduce ('cram down') the interest rate on a car loan, strip off second mortgages that are entirely unsecured, and catch up on mortgage arrears through the plan — all while keeping the secured property.