ABA Family Legal Guide

Consumer Bankruptcy

Straight Bankruptcy: Chapter 7

Chapter 7 Defined

What happens to my encumbered assets during a bankruptcy?

In bankruptcy, a claim is secured to the extent that it is backed up by collateral. Often the collateral is worth less than the amount of the debt it secures, such as a $1,200 car securing a loan balance of $3,000. On the other hand, sometimes a debt is secured by collateral having a value that exceeds the loan balance at the time of bankruptcy, such as a $65,000 home subject to a $30,000 mortgage. The lender is entitled to no more than the $30,000 it is owed. The excess value of $35,000 is referred to as the debtor's equity.

If you cannot make the required payments on a secured claim (and also catch up on any back payments), the creditor has a right to take back the collateral after having the automatic stay lifted or after the discharge. However, you may be able to keep the encumbered item by redeeming it or reaffirming your debt or by continuing to make payments (allowed in some jurisdictions). Generally, the value of an asset is its retail value.