Secured Debt and Bankruptcy

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A common question is can I keep my house or my car when filing bankruptcy even though I still owe money on the loan? The answer is definitely yes. Just keep making the normal payment you have always made each month and you should keep the collateral, the vehicle or house.

But what about things like a motorcycle, an ATV, a travel trailer, an airplane or motor home? If you are current on the payments for the loans you should be able to keep them when filing a Chapter 13 bankruptcy case. The Ninth Circuit Court of Appeals made it clear that these secured debt payments are not within the courts discretion to determine whether they are reasonably necessary or not. See In re Welsh (No. 12-60009, 9th Circuit, March 25, 2013). The Welsh’s owned a house, three cars, 2 ATVs and a trailer. Given this decision bankruptcy lawyers can now provide clearer counseling to clients.

The Chapter 13 trustee reasonably and understandably argued that the Welsh’s were making payments on luxury items not reasonably necessary for the maintenance and support of the Welsh’s or their dependents. The key here is that the Chapter 13 Statement of Monthly Disposable income or Means Test is governed by §707(b)(2) of the Bankruptcy Code. Section 707(b)(2) does not limit the amount of secured debt payments that reduce a debtor’s disposable income. Line 42 or Form 22C, Chapter 13 Statement of Disposable Income, lists the long term secured debts deducted from a debtor’s disposable income. The secured debts are listed in Schedule D of the bankruptcy petition.
The Ninth Circuit Court of Appeals held that if Congress wanted to limit the amount of the secured debt a debtor could have they would have provided language for it in Section 707(b)(2). So, if your monthly mortgage payment is 70% of your monthly income and therefore you have no money left over after living expenses for your credit card companies that is okay. If you are single and have two car payments, two ATV payments and a motorcycle payment is that okay too? You are single and need all of these toys? According to the decision in In re Welsh it is not bad faith to continue to make regular payments on secured debts.

It is still possible that a trustee could attempt to object to confirmation of the chapter 13 plan under other grounds. Make sure that you fully disclose your income expenses and assets to your bankruptcy attorney so they can give you the best possible advice.