Declaring bankruptcy can feel overwhelming, as though you’re putting everything you own on the line, including your hard-earned and necessary vehicle and home. But whether the debt attached to those items is secured or unsecured is the key to knowing what you can keep.
An experienced bankruptcy attorney who specializes in South Carolina law can help you determine how the law will impact your possessions before you file. That insight will clarify how bankruptcy actually works and make your final decision easier.
Key Differences Between Secured and Unsecured Debt
It’s critical to understand the difference between secured and unsecured debt when considering bankruptcy.
Secured debt is backed by collateral: a vehicle, boat, property, or other item that the lender can seize if payments stop. The lender’s claim on the property is called a lien, and bankruptcy generally does not erase liens.
Unsecured debts are those without collateral, like credit card debt, medical bills, and most personal loans. These are most commonly erased by bankruptcy.
The bottom line is, filing for bankruptcy does not automatically mean losing your home or car. It eliminates your personal obligation to pay a debt, but a secured creditor’s lien survives unless it is dealt with through the case. In order to keep the item pledged as collateral, you must continue paying for it.
Your Options for Secured Debt in Chapter 7
Chapter 7 is the most common form of consumer bankruptcy. Under this chapter, you must state your intentions for each secured debt. There are three options to choose from:
Redeem the property. By paying the lender the current market value of the item in a lump sum, the debtor takes ownership. This most often applies to vehicles.
Surrender the property. The debtor gives the collateral back and any remaining balance is discharged along with other unsecured debt.
Options for Secured Debt in Chapter 13
Instead of liquidating assets, Chapter 13 requires a three- to five-year repayment plan. Debtors are able to keep property while paying creditors at least the value of any equity that isn’t protected by an exemption. This chapter is often the right choice for homeowners who fall behind on mortgage payments, because past-due amounts can be spread across the payment plan period while foreclosure is halted by the automatic stay.
South Carolina Exemptions Protect Your Equity
In bankruptcy, an exemption protects an item, account, or equity from creditors (equity is the property’s value minus what you owe). South Carolina sets its own exemptions rather than using the federal list. The state’s exemptions are available to those who have been residents for at least two years; those with shorter tenure usually use the exemptions from their previous state of residence.
Homestead exemption. Equity in a primary residence can total about $80,000 per filer, and double for married couples who are co-owners. Also allowed are a motor vehicle, and a wildcard exemption that can be added to other protected categories. The exemption amounts are adjusted for inflation on July 1 of even-numbered years.
In practice, if you have a vehicle that is worth $9,000 and you owe $6,000, the equity is the difference, or $3,000. If the vehicle exemption covers the equity and payments are current, the vehicle is typically retained regardless of the bankruptcy chapter.
Approaching Bankruptcy Strategically
Understanding how exemptions, reaffirmation, and redemption work in bankruptcy can allow you to keep the property that matters. Lam Law Firm helps South Carolina residents use state exemptions to protect as much of their property as possible. Call for a consultation today.
