11 Jan The Debt and the Lien: Two Completely Different Problems
A debt is a lawful obligation, usually to pay money to someone. Secured Debts are those where the borrower has granted the lender a lien or security interest in some item of real or personal property to ensure that the lender is actually paid.
Two simple and common examples are home loans â€“ where the borrower secures the loan with his house; and car loans â€“ where the loan is secured by the car. In both cases, if the loan isnâ€™t paid when due, the lender can recover the security: the house or the car to pay off the loan.
As a bankruptcy attorney, I explain this all the time to my clients. Itâ€™s not an easy concept to grasp, and I am often asked â€œBut why if I donâ€™t have to make payments, can they still take my car?â€
In Bankruptcy, a discharge will terminate the obligation to pay the debt. But it doesnâ€™t remove the lien! So, although the borrower may no longer have the responsibility to pay the debt, if he wants to keep the security he will have to pay. Thus, a car loan is discharged in most bankruptcies and the borrower no longer has to pay the car company or bank. But the lien remains, so the lender can still pick up the car for non-payment.
The same is true for a home loan. The bankruptcy actually discharges the debt, but the house remains with the lien or mortgage attached. So, the owner canâ€™t sell the house without paying off the bank.
The only real effect the bankruptcy has in either scenario is that the car company or the mortgage bank canâ€™t get any more from the debtor after the bankruptcy than the security. Thus, default on the car payment, the car company gets the car. Donâ€™t pay the mortgage and the bank can foreclose on the house.
image courtesy of: irsmedic.com
Latest posts by Douglas Jacobs, Esq. (see all)
- STUFF YOU KEEP IN BANKRUPTCY - January 31, 2016
- Bankruptcy And The Elderly - April 11, 2014
- Four Steps to a Successful Chapter 7 bankruptcy - March 11, 2014
- Thinking About Filing Bankruptcy? Now Might be the Right Time. - February 11, 2014
- The Debt and the Lien: Two Completely Different Problems - January 11, 2014