Tier-One Legal Advice

Your rights as a lender with a secured debt in bankruptcy

On Behalf of | Oct 25, 2021 | Firm News |

Many companies completely lose out on the right to collect on a debt when an individual or business files for bankruptcy. Bankruptcy offers the person or business filing an automatic stay that will result in the courts dismissing pending lawsuits and limiting your ability to continue trying to collect on the debt.

Thankfully, as a secured creditor, there is a valuable asset associated with the debt. In the case of a secured credit card, there would be a deposit. For mortgages or car loans, there are pieces of personal property attached to the loan.

How can your business respond to a borrower or debtor who files for bankruptcy with an unpaid, secured debt to your business?

The borrower has to make a decision

When it comes to secured debts and personal bankruptcy, the person who owes the money has to decide how to proceed. Typically, they will take one of two approaches, although there are technically three choices available.

The first would involve reaffirming the debt as it stands to retain the collateral property and the financing terms they initially had. The second involves renegotiating the debt. A borrower may ask to extend the repayment period or to reduce their interest or monthly payments to make repayment easier for them.

However, there is also the third option, which means the borrower discharges your debt. Someone filing for bankruptcy who does not want to renegotiate or reaffirm the debt may instead intend to give up the collateral property and the loan attached to it. Their decision about which of these three approaches they pursue will affect what steps you take next.

The borrower cannot keep the collateral property without reaching an arrangement

Bankruptcy does not summarily dissolve someone’s financial obligations to others. Someone who turned to your company for financing to buy a vehicle cannot simply discharge the remaining balance on the loan and keep the vehicle.

Although it is possible that your company may not receive the full amount it would have otherwise, you can still theoretically expect to receive repayment for the loan or collect the collateral property. Learning about the kind of bankruptcy someone files will give you a better idea about your rights as a creditor in this process.