What is a secured debt? Part 3 – non-purchase money security interest
By Chip Parker, Jacksonville Bankruptcy Attorney on Aug 29, 2007 in Bankruptcy Practice and Procedure, Benefits of Bankruptcy, Chapter 13 Bankruptcy, Chapter 7 Bankruptcy, Florida, General Bankruptcy Information
In Part 1, I discussed perfected security interest, such as home mortgages and car titles.
In Part 2, I discussed purchase money security interests (a.k.a. PMSI), such as store credit cards.
Another very common type of secured debt is the Non-PMSI. A non-PMSI is a lien placed on the debtor’s property, as a result of the debtor’s written permission, that is then properly recorded in accordance with law.
Debtors often get offers in the mail from companies like Wells Fargo, Beneficial or American General to borrow money, and as part of the application process, the debtor is required to list his personal property (bicycle, stereo, TV, lawn mower, etc.) as security for the loan. That list, known as a UCC-1, is the debtor’s pledge to secure the loan. This document is sometimes referred to as a chattel mortgage.
Understand the difference between a PMSI and non-PMSI: With a PMSI, the debtor buys the collateral with the funds from the secured creditor. With a non-PMSI, the debtor already owns the collateral.
Bankruptcy attorneys love non-PMSI debts because we can usually strip the security interest away from the loan, converting the secured creditor to an unsecured creditor. Section 522(f) of the bankruptcy code allows the debtor to file a Motion to Avoid Lien, which alleges that the lien impairs an exemption that the debtor would otherwise have.
For example, in Florida, debtors enjoy a personal property exemption of $1,000 ($2,000 for joint debtors, and an additional $4,000 for each non-homeowner) covering household items such as televisions, stereos, furniture and the like. If American General lends the debtor money, taking a pledge of these items as collateral, the debtor can no longer enjoy the exemption. In my 15 years of practicing bankruptcy law, I have always successfully stripped such non-PMSI debts.
So, an Order Avoiding Lien in a Chapter 13 will allow the debtor to treat the creditor as unsecured, which will usually lower the Chapter 13 plan payment. In a Chapter 7, an Order Avoiding Lien will wipe out the debt altogether.
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