How Bankruptcy Affects Secured Debts in Virginia
Bankruptcy can provide relief for individuals facing overwhelming financial burdens, but understanding how it affects secured debts is crucial for anyone considering this option in Virginia. Secured debts are obligations linked to collateral, meaning if a borrower fails to meet payment terms, creditors can seize the asset linked to the debt.
In Virginia, secured debts can include mortgages, car loans, and personal loans secured with collateral. When declaring bankruptcy, it’s essential to distinguish between different types of bankruptcy filings—primarily Chapter 7 and Chapter 13—as each has unique implications for secured debts.
Chapter 7 Bankruptcy and Secured Debts
Chapter 7 bankruptcy, often referred to as liquidation bankruptcy, allows individuals to discharge most of their unsecured debts, giving them a fresh start. However, it does not eliminate secured debts unless the borrower surrenders the collateral. In Virginia, if you choose to keep the secured asset, you must continue making payments to avoid repossession.
If a secured asset’s value is less than the amount owed (underwater), bankruptcy may provide a way to eliminate other debts while retaining ownership, but this requires staying current on payments. Failure to do so can result in the lender repossessing the asset.
Chapter 13 Bankruptcy and Secured Debts
Chapter 13 bankruptcy is designed for individuals with a regular income who wish to pay off their debts over time. This form of bankruptcy creates a repayment plan lasting three to five years. When it comes to secured debts, Chapter 13 offers more flexibility than Chapter 7.
With Chapter 13, borrowers can catch up on overdue payments through the repayment plan, allowing them to retain their secured assets. Additionally, if the value of the secured asset is less than the debt owed, it is possible to "cram down" the value to the current market rate while restructuring the debt.
Options for Handling Secured Debts in Bankruptcy
Debtors in Virginia must consider their options carefully when it comes to secured debts. Here are common strategies:
- Surrendering the Asset: If the value of the secured asset is not worth the debt, surrendering it can simplify the process and allow you to reallocate your finances.
- Reaffirming the Debt: In some cases, debtors may choose to reaffirm their secured debts to retain the asset, resulting in them being liable for the debt even after bankruptcy.
- Redeeming the Asset: Under Chapter 7, debtors can sometimes redeem the secured asset by paying its current market value in a lump sum, which can be beneficial if the asset has significant value.
Impact on Credit and Future Borrowing
Declaring bankruptcy will impact an individual’s credit score, depending on the outcome of how secured debts are managed. Chapter 7 typically remains on a credit report for ten years, while Chapter 13 stays for seven. However, successfully paying off secured debts through Chapter 13 may positively influence credit over time, as it demonstrates responsible financial behavior.
In conclusion, while bankruptcy can be a lifeline for those struggling with secured debts in Virginia, understanding the nuances between Chapter 7 and Chapter 13 is vital. It’s protective to consult with a bankruptcy attorney to navigate these complexities effectively and make informed decisions regarding secured debts.