I've written here recently about how to keep your vehicle that you owe money on when filing a Chapter 7 "straight bankruptcy" case. See my previous blog posts Reaffirming Your Vehicle in a Chapter 7 and
Do I Have to Reaffirm My Vehicle in California?
But what about other kinds of personal property—furniture, appliances, electronics—that are collateral on a debt? How do you keep those kinds of collateral if you file a Chapter 7 case?
WHAT DIFFERENCE DOES IT MAKE IF YOUR PERSONAL PROPERTY IS LEGALLY COLLATERAL ON A DEBT?
Outside bankruptcy, and especially in a bankruptcy case, this can make all the difference.
Focusing on Chapter 7, most debts not secured by any collateral are simply "discharged"—legally written off. And that would be the end of it.
But if that debt is secured by some collateral, then if you discharge the debt the creditor will have a right to repossess the collateral. You would usually have to either surrender the collateral or pay money—perhaps even the full amount of the debt—to be able to keep the collateral.
If a debt is secured by your furniture or other personal property you own, you will need to think about entering into a reaffirmation agreement on the debt—a portion of the debt or all of it. As with a vehicle loan, the reaffirmation agreement excludes that debt—or the reaffirmed portion—from the bankruptcy discharge of your debts. You would owe the reaffirmed debt just as you would if you had not filed bankruptcy.
WHEN IS A DEBT SECURED BY COLLATERAL?
With a vehicle loan you can tell very easily whether the vehicle is collateral on the loan or not—the creditor would be a lienholder on your vehicle title. If for some reason you do not have access to your title, you can quickly get a "Vehicle Record" printout online from the California Department of Motor Vehicles, after registering and paying $2. Of course most of the time you will likely simply know whether your vehicle has a lienholder because you financed its purchase, or clearly gave the vehicle as collateral on a loan from a creditor.
But with other kinds of personal property, it's often not easy to tell whether a particular item is or isn't legally collateral on a debt or not. That's because most other kinds of personal property do not come with a title that would clearly reveal a lienholder.
Two distinct steps are usually required for an item of personal property to be collateral on a debt: 1) you must agree to grant the creditor a "security interest" in that property (essentially, a right to repossess if you fail to pay the debt), and 2) the creditor must "perfect" the security interest by taking some legally prescribed step to inform anybody who would want to know of the existence of the creditor's "security interest" in the property.
So to figure out whether some item of your property is collateral on a debt you need to know whether you agreed to that (even if you didn't realize that you did), and then whether the creditor took the right step to "perfect," or finish creating, the "security interest"—its rights to that item of property.
SO IS THE ITEM YOU BOUGHT ON CREDIT COLLATERAL OR NOT?
You can give a creditor a "security interest" very easily and without knowing that you are doing so. The details depend on your state's specific laws, but generally all it takes is you signing something that in the fine print says that you "grant a security interest" in whatever you are purchasing. That language may not even be in whatever you sign, but may be in a document merely referred to in what you sign.
Generally, if you are buying consumer goods (other than a vehicle or other titled personal property), "perfection" is automatic—the creditor does not need to take any further step to "perfect the security interest."
So in most cases, if you bought personal property and owe a debt related to that purchase, that property is collateral on that debt if you agreed at any point that whatever you purchase is collateral on the debt.
In some cases a creditor may claim that it has a security interest against personal property, but the security agreement may be invalid. The creditor may not have followed the required steps or used the appropriate language to create a security interest against your property. It is important that your attorney review the security agreement to determine whether it created a valid security agreement. If the security agreement is invalid then you do not have to reaffirm the debt to keep the collateral.
HOW ABOUT ITEMS OF PROPERTY THAT YOU OWNED BEFORE TAKING OUT A LOAN?
Besides giving a "security interest" in something at the time you are purchasing it, you can also do so with something you already owned beforehand.
Again, all it generally takes is a phrase in your loan agreement stating that you "grant a security interest" to the creditor in the property at issue.
However, "perfection" in this situation is not automatic. Usually the creditor must prepare and file with the state's secretary of state a "financing statement" specifying the names of the creditor and the debtor, and the property being given as collateral.
SO YOU REAFFIRM DEBTS THAT HAVE COLLATERAL AND DON'T THOSE THAT DON'T, RIGHT?
That's generally right. If you want to keep something that is collateral on a debt, you need to sign a reaffirmation agreement so that you are legally bound to repay the debt in return for getting to keep that collateral.
BUT WHAT IF YOU DON'T KNOW AND CAN'T FIND OUT WHETHER SOMETHING IS COLLATERAL ON A DEBT?
True, it is not always easy to tell whether a particular item of personal property is collateral on a debt. The agreement which would determine whether or not a "security interest" was created is often not readily available. Again, you may not know whether you ever entered into such an agreement.
There is no point to paying a creditor to protect something you want to keep if the creditor does not have a legally enforceable right to it. And generally the creditor will contact your attorney during the Chapter 7 case if it wants to be paid in return for you keeping the collateral. But there IS a risk that a creditor secured by collateral does not come forward until after the Chapter 7 is completed, by threatening repossession. The "security interest" in collateral generally continues in force after the bankruptcy is over, so to the extent the effort is worthwhile you and your attorney should do what is necessary to determine whether your debts are secured by any of your personal property.
WHAT IF YOU NO LONGER OWN THE COLLATERAL?
You may have sold, given away, or otherwise discarded collateral on a debt, either because you did not know that a creditor had a right to it or because you simply didn't care. Depending on the circumstances this could theoretically give the creditor grounds for accusing you of fraud for "stealing" its collateral, but most of the time there is not enough at issue for the creditor to "spend good money after bad" to pursue the matter.
WILL A CREDITOR CHASE DOWN COLLATERAL NO MATTER HOW MINOR?
That's an excellent question. Most creditors have to be practical. Unless simply out to hurt you (which is rare—with the exception of ex-spouses and disgruntled ex-business partners!), they have to financially justify whatever collection action they take. So they do not tend to chase collateral that has depreciated into being virtually worthless (such as older computers and other electronics) or will cost as more to repossess and resell than would come from that resale.
In many cases involving used jewelry with minimal value, and used furniture and electronics, the creditor is not likely to pursue the collateral even if it has a valid security agreement.
WHAT'S THE BOTTOM LINE?
Your experienced bankruptcy attorney has likely dealt with all or most of your creditors many times before, and will know which tend to be secured by collateral, and which creditors tend to pursue collateral, and under what circumstances. Make sure you tell her or him what personal property is particularly important to you, and if you have any hints that it may have been either purchased on credit or given as collateral on a loan. As we have seen there are some practical ambiguities in this area, but with professional guidance you will not have any rude surprises and will get to keep what you want without wasting your money.