What Happens to Secured Debts Under Louisiana Bankruptcy Law

What Happens to Secured Debts Under Louisiana Bankruptcy Law

When individuals find themselves in financial distress, they often consider bankruptcy as a viable option for relief. In Louisiana, the treatment of secured debts during bankruptcy proceedings is a crucial aspect to understand. Secured debts are loans backed by collateral, which provides the lender assurance that they can reclaim the asset if the borrower defaults. Common examples include mortgages and auto loans. Under Louisiana bankruptcy law, the handling of these debts can vary depending on the type of bankruptcy filed.

There are primarily two types of bankruptcy individuals might consider: Chapter 7 and Chapter 13. Each has different implications for secured debts.

Chapter 7 Bankruptcy

In a Chapter 7 bankruptcy, also known as liquidation bankruptcy, the debtor’s non-exempt assets may be sold to pay off creditors. However, many individuals qualify for the Louisiana exemptions that allow them to keep certain assets, including their home and vehicle under specified conditions.

For secured debts, the treatment in Chapter 7 typically involves three options:

  • Reaffirm the Debt: The debtor can choose to reaffirm the debt, which means they agree to keep making payments and retain the collateral. This option is often selected by individuals wishing to keep their homes or vehicles.
  • Surrender the Collateral: If the debtor cannot afford the payments, they may surrender the collateral back to the lender. By doing this, they are relieved of the personal liability for the debt, but they will lose the asset.
  • Redeem the Collateral: Under this option, the debtor can pay the secured creditor the current value of the collateral, typically at a price less than the total debt owed, allowing them to keep the asset.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy allows debtors to create a repayment plan to pay back some or all of their debts over a three to five-year period. This option is often more favorable for those with secured debts, as it can help them keep their assets.

In Chapter 13, secured debts are often addressed as follows:

  • Plan Payments: Debtors propose a repayment plan that outlines how they will keep up with their secured debt obligations while also repaying other creditors.
  • Cramdown Option: Louisiana law permits the 'cramdown' provision, allowing debtors to reduce the amount owed on certain secured debts to the value of the collateral. For instance, if a car is worth $10,000, but the borrower owes $15,000, they may only need to repay $10,000 through the plan.

Implications of Default

In cases where a debtor defaults on a secured debt during or after bankruptcy proceedings, the lender retains the right to reclaim the collateral. This reclaiming of assets is referred to as repossession in the case of vehicles, while foreclosure applies to real estate. Debtors must be cautious and proactive in addressing their secured debts to avoid losing essential assets.

Conclusion

Understanding what happens to secured debts under Louisiana bankruptcy law is essential for anyone considering filing for bankruptcy. The choice between Chapter 7 and Chapter 13 can significantly impact how secured debts are managed. Whether reaffirming the debt, surrendering collateral, or creating a repayment plan, it is crucial for debtors to seek advice from a qualified bankruptcy attorney to navigate the complexities of their financial situation effectively.