Impact of Discharge
on Secured Debts
This discussion of secured debts is from “Overview of Arizona Divorce Principles for Bankruptcy Practitioners” by John McKindles
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Table of Contents
B. Separate Property
C. Liability for Debts of Spouse
Jurisdiction to Control and
Dispose of Community and Separate Property Assets
Jurisdiction to Determine
Separate Property Rights
Jurisdiction Over Allocation and
Disposition of Debt
ERISA Retirement Plans and the
Community Property and the
I. Priority of Past Due Support Over
J. Protection of Dissolution and
Advisability of Joint Bankruptcy
Filing and Conflict of Interest Problems
Impact on Future Community
M. Impact of Discharge on Secured
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
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.