Bankruptcy - Will the Creditor Take the Stuff I Put up as Collateral?

Bankruptcy – Will the Creditor Take the Stuff I Put up as Collateral?

“If I file bankruptcy in Georgia, will the creditor take the stuff I put up as collateral for the loan?”

I was just asked this question by a bankruptcy client in my Rome, Georgia office this afternoon.  In almost every case, the answer is no.

Many Georgia bankruptcy clients have debts with small loan companies.  When the loan is made, the company will usually ask you to list everything you own and to place a value on each item you list.  Many people do not even realize that they are putting their stuff up as collateral for the loan.  However, once they miss a few payments, the loan company will quickly emphasize to the person that if they don’t make payment immediately, the loan company will be coming to their house to pick up the collateral.

“What collateral?” you ask.

“Everything you listed on the contract when you took out the loan with us” he answers.

Fortunately, we can avoid liens on household goods if the lien is a nonpossessory nonpurchase money security interest in household goods.  For example, lets say you took out a loan with Badapple finance company.  Let’s say you put up a $100 television, a $100 bed, and a $100 set of dishes as collateral.  When you file for bankruptcy in Georgia, a motion to avoid the lien on your household goods can be filed against Badapple finance company.  Once the lien is avoided, Badapple’s claim will be treated as an unsecured claim in your case.  As a consequence, you may be able to eliminate the entire debt.

To make things clear, let’s give an example of a purchase money security interest.  This situation is the complete opposite of the previous paragraph.  Let’s say you went to Ripoff Electronics store a purchased a big screen television.  Since you bought the television from Ripoff, they have a purchase money security interest in your big screen television.  In contrast to the example in the previous paragraph, this lien cannot be avoided.

When you meet with your bankruptcy attorney, make sure you tell him the fine details about every debt you have where you may have listed collateral on the contract documents.  This will ensure that the debt gets properly listed in your case and that all necessary motions get filed in your bankruptcy.

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