What is a secured debt? Part 2 – purchase money security interest

In Part 1, I discussed perfected security interest, such as home mortgages and car titles. The next common type of secured debt is the purchase money security interest (also known as a “PMSI”). Like a perfected security interest, a PMSI is a voluntary lien placed on the debtor’s property as a result of the debtor’s written permission, but unlike a PMSI, the interest is automatically “perfected” without being recorded. In other words, the lien holder does not need to take any extra steps to ensure the loan is secured by certain property belonging to the debtor.

This type of security is created when a debtor buys personal property using money borrowed directly from the seller. The most common example is a store credit card, such as Rooms to Go or Sears. For example, if a computer is purchased from CompUSA using store credit, the debt is automatically secured by the computer. If the same computer is purchased using a credit card (e.g. Visa, MasterCard, American Express or Discover), the debt is totally unsecured.

Like other secured debt in a Chapter 7 bankruptcy, the debtor can choose to pay the debt (known as reaffirmation agreement) and keep the merchandise. In the alternative, the debtor can choose to surrender the merchandise and discharge the debt.

In a Chapter 13 bankruptcy, the debtor can “value” the merchandise, and pay the creditor only an amount equal to the fair market value. Any remaining amount owed would be treated as an unsecured claim.