The Sale of Secured Collateral - What Happens to Me Now?

What is “Secured Debt?”

   Everyone knows that when you buy a car or a home your obligation to pay your creditor is a “secured debt.”  In other words, if you do not pay your obligation your loan goes into default and the secured creditor can take back its collateral.  In the case of a car or truck, this default remedy is called “repossession.”  In the case of a mortgage debt, this default remedy is called “foreclosure.”

   Vehicle loans and mortgage debt are called “secured” debts because property (“collateral”) “secures” the loan.

   In order for a loan to be secured, you will have to sign something called a security agreement.  Security agreements may be long and detailed, or they can be very brief - we have seen language that creates a security agreement on the back side of a sales receipt.

   Lenders who retain security agreements on personal property loans may “perfect” their lien by filing a document called a UCC-1 in the county where the property is located.  The filing of the security agreement serves as legal notice of the security agreement to any subsequent purchasers or lenders.   If the borrower subsequently pledged the secured collateral with another lender, the A lender with a properly filed UCC-1 would have a priority interest in the collateral in the event of a collection lawsuit or default.

   You don’t need to fully understand the laws relating to secured transactions - for bankruptcy purposes, however, a secured debt takes priority over an unsecured, signature only, loan.

    Mortgage debt and vehicle debt are not the only types of secured loans.  Other common types of secured debt include:

• furniture purchase debt
• jewelry purchase debt
• appliances and electronics
• “big ticket” purchases of things
• certain types of department store credit card accounts

What Happens if I Sell the Property that is Subject to a Security Agreement

   Sometimes, you may discover that you sold an item of property that was subject to a security agreement.  For example, you may have held a garage sale to raise money, and you might have sold off a big screen tv, a pool table, a washer/dryer or furniture.

   In a Chapter 7 case, the secured creditor may send a representative to the Section 341 meeting of creditors to ask you about the sale.  If you know who has the property, the creditor representative may ask for the name, address and contact information of the purchaser.  The purchaser may end up having to return the collateral to the secured creditor.

   Often, secured creditors will simply write off the loan, especially if the collateral is something that has likely lost most of its value, like furniture, appliances or electronics.

   Sometimes, however, the secured creditor will ask you to pay some or all of the outstanding debt and may file an objection to the discharge of its debt or to your discharge in general.  This type of action by secured creditors is, thankfully, quite rare and usually a reasonable deal can be worked out.

   In a Chapter 13, the secured creditor may file a secured claim, which can mean that this creditor’s claim will be paid in full, or close to in full, with interest.   Here, too, we can negotiate on your behalf to reduce the claim, or we can surrender your interest in the collateral.

   Our experience has been that in most cases, your action of selling collateral that was subject to a security agreement will not have significant consequences.  However, we always like to know about this potential issue sooner rather than later.  So, if you believe that you own or previously owned personal property that was subject to a security interest, please let us know when we first meet with you.