This is not a question I get very often but it is something that comes up more than my clients think. Your home loan and your car loan are secured and, with very rare exceptions, perfected. The home loan is generally secured and perfected by the deed of trust filed with the County Recorder. Your car loans are usually secured and perfected by the lien being listed on your car title. What about the TV you bought at BestBuy with the BestBuy credit card you got or the John Deere tractor you bought with a John Deere credit card? You can replace a variety of other purchases with these but the question is still the same, are these purchases secured and are they perfected. In Maryland, and most states that use the Uniform Commercial Code, the answer is yes.
With most credit cards like your normal Visa or MasterCard, there is no security interest in what you buy. This changes when you get a store credit card to buy consumer goods like electronics, furniture, jewelry, or other goods. This is because usually in the credit agreement there is a provision that grants a security interest to the lender in what you are buying with the store credit card. This is called a purchase money security interest because you are using the money loaned to you to buy the item that secures the loan to you. Like a home loan and a car loan, these types of loans are technically secured loans and the loan is perfected.
Under Section 9-309 of Maryland's Annotated Code, Commercial Law Article, a purchase money security interest in consumer goods is perfected upon attachment. In other words, as soon as you sign the security agreement it is a perfected interest and a lien attaches.
What does this mean for you as a Debtor? It means that some decisions have to be made about how you are going to treat these debts in your bankruptcy. Like other secured debts, you will have to make a decision about whether you are going to reaffirm the loan, redeem the collateral, or give back the items securing the debt. This would not be the case if the lien did not exist. You could discharge the loan and keep the good.
There is some practical reality that plays into this analysis. In many cases your attorney will get calls and letters from the secured lender asking what your intention is regarding the loan. In many cases, especially if the collateral is consumer electronics or household furniture, you will be able to keep the collateral without making any decision on the loan as the lender will not really come after the good. However, if the good is something large like a lawn tractor or jewelry, the lender may be more aggressive. The lender may even attempt to repossess the good, which is its right. If this is the case and you really want to keep the good redemption or reaffirmation may be your only option. In most cases, the lender is willing to renegotiate the terms of the loan through reaffirmation often reducing principal or eliminating interest on the loan. More often than not this results in lower monthly payments and a shorter loan term.
No lender is the same and so how your loan will be treated in this process depends on who your lender is and whether they have engaged outside counsel to handle the matter for them. The point here is that when proceeding in bankruptcy with one of these types of debts keep in mind their status and that they are in fact a perfected secured debt. In my next post I will discuss student loan debt in bankruptcy.