DIVORCE AND BANKRUPTCY

Impact of Discharge
on Secured Debts

Excerpt from “Overview of Arizona Divorce Principles for Bankruptcy Practitioners”

March 2003

John McKindles

Learn more about Mr. McKindles's Divorce and Family Law practice

Table of Contents

A. Community Property

B. Separate Property

C. Liability for Debts of Spouse

D. Jurisdiction to Control and Dispose of Community and Separate Property Assets

E. Jurisdiction to Determine Separate Property Rights

F. Jurisdiction Over Allocation and Disposition of Debt

G. ERISA Retirement Plans and the Bankruptcy Estate

H. Community Property and the Bankruptcy Estate

I. Priority of Past Due Support Over Other Creditors

J. Protection of Dissolution and Lien Rights

K. Advisability of Joint Bankruptcy Filing and Conflict of Interest Problems

L. Impact on Future Community Property Interests

M. Impact of Discharge on Secured Debts

The secured creditor’s status, although better than an unsecured creditor, is certainly not sacrosanct. Under a Chapter 7 filing, the secured creditor will generally be able to continue to either collect under the terms of the secured debt or seek to foreclose on the security, after ob­taining relief from the automatic stay.

Also, however, an individual debtor may redeem tangible personal property intended primarily for personal, family or household use from a lien securing a dischargeable consumer debt if the property is exempt, been abandoned or by paying the amount of the “allowed secured claim” of the creditor. See 11 USC §722.

The problem with redeeming property for the “allowable secured claim” (fair market value) is that it requires a lump sum payment. See In Re Walker, Bkrtcy. M.D.N.C. 1994. 173 B.R. 512.

The courts have fairly routinely interpreted the redemption statute to require a lump sum pay­ment instead of installments.

So the tradeoff is to either find the money to make a lump sum “fair market” payment to redeem the property or to continue to pay under a reaffirmation agreement the creditor under the terms originally agreed upon or as subsequently negotiated with such creditor.

However, not all secured debt enjoys the same status. For example, a judgment creditor may well secure a judgment lien against an exempt asset pursuant to USC §522. Section 522(b)(1) exempts under bankruptcy law (for the purpose of Arizona) the homestead exemptions detailed in the state’s statutes relating to exempt property.

The statute further exempts in subparagraph (f)(1)(A) property from a judicial lien, allowing the debtor to avoid such a lien. (Other than a judicial lien that secures a debt to a spouse, former spouse or child of the debtor for alimony maintenance or support.) The statute further authorizes a debtor to avoid a lien that consists of a nonpossessory, nonpurchase money security interest in exempt property.

Generally, the debtor has the choice of continuing to pay after reaffirmation to a secured creditor and retain the asset or return the asset to the security creditor.

There is also the possibility of qualifying secured non-exempt assets as burdensome assets, depending upon the values. ●