Despite the efforts of his parents, my 17 month old son has no attachment to the homemade blanket (pictured to the right) his mother crocheted for him. We wanted him to have something to hold on to should he need it.
We wanted him to have something to make him feel secure should we not be there to comfort him or give him what he needs.
He is pretty attached to a little finger puppet set I bought for him, but that is another story.
You see, creditors are like toddlers. They whine, they complain, they harass and they are always hungry. Unfortunately, they are not endearing, lovable and cute.
In addition, creditors, like toddlers, sometimes need a security blanket to lend you money. This is known as secured debt.
Secured debt is not just legal jargon for attorneys. This is a term that should be understood by all consumers.
What is Secured Debt?
Sometimes creditors will need a “blanket” before they will be willing to lend you money. This blanket comes in the form of a lien.
Secured debt is basically a loan that is backed up by a lien on certain property owned by the borrower.
This lien gives the bank security. Should you default on your loan repayment, the bank has the right to take the property from you. This usually comes in the form of repossession or in the case of real estate, foreclosure.
As secured debt is less risky to lenders, it usually comes with relatively low interest rates when compared to credit cards which are “unsecured.”
The most familiar types of secured debts are mortgages, home equity loans (HELOC) and car loans.
Unfortunately, the security blanket sometimes rears its ugly head in the strangest places. Some retail purchases are secured and consumers need to be aware of this when they apply for store credit.
“But we Love That Sofa”
I recently had to explain this topic to a couple that I am helping file chapter 7 bankruptcy. They had purchased some furniture at Raymour & Flanigan and applied for store credit simultaneously to make the purchase..
They had absolutely no idea that Raymour & Flanigan maintains a lien on goods purchased and should the debt not be paid, they have the right to repossess.
They were completely shocked and she cried, “…but we love that sofa!”
I proceeded to tell them that it is extremely rare that retail goods are repossessed and that as long as the debt was paid, they would be able to keep their beloved sofa.
Retail stores such as Raymour & Flanigan, Best Buy and Sears sometimes maintain a security interest in the property purchased at their stores so consumers should be aware.
Secured Debt in Bankruptcy
Secured debt is absolutely dischargeable in bankruptcy. This is sometimes misunderstood because while the debt is discharged, the lien survives.
It is sometimes confusing, but while a debt may be legally discharged and there is no future obligation to pay, you must pay to avoid repossession (or foreclosure) of the property.
Of course, discharged secured debt could be “reaffirmed” through a private agreement with the creditor. New and favorable terms could be negotiated through the reaffirmation process, however, reaffirmation is a serious legal decision and should be thoroughly discussed with an experienced bankruptcy attorney.
Sometimes, depending on the condition, description and age of the goods, creditors will abandon the property completely.
So, please remember that creditors are not cute and cuddly when they request “security.” They are protecting their interests and all consumers (not just those filing bankruptcy) should be aware of how secured debt can impact their future financial situation.
Image courtesy of my son Paxten.