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How are secured debts treated in Chapter 7 bankruptcy?

Secured debts are debts that have some sort of property pledged as security. When you get a loan to buy a car or a house, you take out a secured loan.  The car or the house is the security or collateral for the loan.  Secured debts can either be wiped out in a Chapter 7 bankruptcy or not – you have a choice with secured debts.  You can keep the car, house, or property and continue to pay the debt or you can give the property up and walk away, owing nothing.

A secured loan creates two obligations for the loan.  The first obligation is the security interest that allows the lender to repossess or foreclose the property if you stop making payments.  The second obligation is your obligation to pay the loan.  If the car is repossessed or the house is foreclosed, the loan company can come after you for the money you still owe on the loan.  This is known as the deficiency balance.  Chapter 7 bankruptcy eliminates your personal obligation to pay the loan and if the property is repossessed or foreclosed, the company cannot come after you for the deficiency.  If you choose to continue paying and retain the car, house, etc – the creditor provides what is called a Reaffirmation Agreement.

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