Important Definitions You
Should Know About Bankruptcy

The following information regarding bankruptcy can be found in the book "How to File for Bankruptcy" published by Nolo Press. If after reading the material or consulting an attorney, you decide to use our service, our downloadable form is on this page to the left. Simply download and complete the questionnaire and fax, mail or drop it off to one of our offices. We do the rest! Any questions please call (805) 582-6172.

Important Definitions:
Types of Liens Created by Secured Debts

Various types of liens are created by secured debts. The type of lien on your property often determines which lien-reduction or lien-eliminating procedures you can use.

 

Security Interests—Liens You Agree To

If you voluntarily pledge property as collateral—that is, as a guarantee that you will pay a debt—the lien on your property is called a security interest. Many written security agreements give the creditor the right to take the property after you miss a payment.

The most common types of security interests are:

• Purchase-Money Security interests: If you purchase an item on credit and pledge it as collateral for the debt, the lien on the collateral is called a purchase-money security interest. Typical purchase-money secured debts are automobile loans and debts for large furniture purchases.

These kinds of liens cannot be eliminated in bankruptcy. You will have to either honor the original contract and continue making payments, or pay the value of the property up front to keep the property.

• Nonpurchase-Money Security Interests: If you pledge property you already own as collateral for a loan, the lien is called a nonpossessory nonpurchase-money security interest. If you retain possession of the property, for example you borrow from a lending company or credit union, and pledge your car or stereo equipment as security for the loan, the loan is called nonpossessory.

These kinds of liens can be eliminated in bankruptcy if the collateral is exempt and meets certain criteria.

If you don’t retain possession of the property, for instance, if you turn property over to a pawnshop, the loan is called possessory. These liens cannot be eliminated in bankruptcy.

Liens Created Without Your Consent

If a creditor gets a lien on your property without your consent, it is termed a non-consensual lien. There are three major types of non-consensual liens.

• Judicial Liens: A judicial lien is created against your property by somebody who wins a money judgment in a lawsuit against you, and then takes the additional steps necessary to record a lien against your property.

If a judicial lien is on exempt property, you can probably eliminate it in bankruptcy unless it arose out of a mortgage foreclosure.

• Statutory Liens: Non-consensual liens can also be created automatically by law. For example, in most states when you hire someone to work on your house, the worker or supplier of materials automatically gets a mechanic’s lien or "materialman’s lien" on the house if you don’t pay. Liens like these are called statutory liens.

A statutory lien can be eliminated in bankruptcy if it:

did not become effective 90 days or more prior to the date you filed for bankruptcy was not perfected (made official by filing the applicable documents with the land records office) before you filed for bankruptcy, or is for rent you owe.

These liens can be eliminated only as "preferences." There is no specific provision in the bankruptcy code for eliminating these kinds of liens.

EXAMPLE: Sam’s home suffered severe water damage after a pipe burst in the upstairs bathroom. He had the damage repaired at a cost of $4,000. Now, because of unexpected medical bills, he can’t pay the plumber and carpenter the last $2,000 he owes them for the work done on the house. The carpenter and plumber have a statutory lien on his house for $2,000.

Tax Liens: Federal, state and local governments have the authority to impose liens on your property if you owe delinquent taxes. Tax liens are usually impossible to eliminate in bankruptcy.

Is Collateral Pledged for the Debt?

When deciding whether or not file a bankruptcy, it is crucial that you know the difference between secured and unsecured debts.

Secured Debts: A debt is secured if you stand to lose specific property if you don’t make your payments to the creditor. A debt is also secured if a creditor has filed a lien against your property. To completely eliminate a secured debt in bankruptcy, you may have to give up the property that is security for the debt (called collateral) or pay its market value. In a few situations, you may be able to wipe out the lien in bankruptcy. If you truly need the item (for instance, a car or expensive work tools), bankruptcy may not be the best remedy for you.

EXAMPLE: Ken buys a car for $10,000, to be paid off in four years. While still owing $7,000, he files for Chapter 7 bankruptcy. Ken can discharge the $7,000 debt, but he will have to either surrender the car to the creditor or make new arrangements to pay for it.

Unsecured Debts: An unsecured debt is any debt for which you haven’t pledged collateral or for which the creditor has not recorded a lien. The debt is not related to any particular property you possess, and failure to repay the debt will not entitle the creditor to repossess property (although the creditor could sue, get a court judgment on the debt and then take some of your property to satisfy the judgment). Most debts are unsecured, including bank credit card debts, medical and legal bills, utility bills and most store revolving charge accounts. Most unsecured debts are simply canceled by bankruptcy.

For more information about filing for bankruptcy, see our Important Information page.

You can even download an application for Bankruptcy and open it in Adobe Acrobat Reader. If you do not own a copy of Acrobat Reader, we have provided the link for a FREE copy of Adobe Acrobat Reader. 

We are a debt relief agnecy.  We help people file for bankruptcy relief under the Bankruptcy Code.

Simply download and complete the questionnaire and fax, mail or drop it off to one of our offices. We do the rest! Any questions please call (805) 582-6172.