Credit Cards as Secured Debts: Often Claimed, Rarely Proved ...
The issue of whether a credit card debt can be claimed to be a "secured" debt in bankruptcy is a common discussion for attorneys who handle Chapter 13 bankruptcies in particular. In a Chapter 13 bankruptcy, creditors are repaid some or all of what they are owed. (See my Chapter 13 plan page here for more detail on how this works!). In order to be paid, the creditor must file a document called a "proof of claim" with the bankruptcy court, which purports to show how much the creditor is owed, documentation proving that they are the party owed the funds—and what kind of debt is owed. That is, secured or unsecured (and priority or non-priority unsecured). This happens in a Chapter 7 bankruptcy also when the Chapter 7 Trustee does manage to liquidate some of the debtor's property and generate funds for the debtor's creditors. (See more on property liquidation in Chapter 7 bankruptcy here.) Secured creditors are paid first when funds are distributed to creditors in a Chapter 13 or Chapter 7 bankruptcy. Unsecured creditors are paid last, and only when there is anything left over after secured (and other priority) creditors are paid first. That being the case, for a creditor, it is advantageous to be a secured rather than unsecured creditor in a bankruptcy case. The question is: when a creditor claims to hold a "secured" debt, is it really?
What is a "Secured" Debt?
First, what is a "secured" debt? A "secured" debt is a debt for which the promise to repay is secured by some "collateral." Collateral is property that will be repossessed or foreclosed if the borrower fails to repay the debt. The most common sorts of secured debts that people tend to have are car loans or mortgages. If you don't make the car payments, the car gets repoed. If you don't make the mortgage payment, the home gets foreclosed. Car loans are "secured" because the auto loan agreements, first of all, provide that the lender will have a property interest in the car you are purchasing until the loan is paid off. They then file a record of that security interest with the Michigan Secretary of State's office, and a notation of the existence of the security interest is printed on the vehicle's title. A home loan is "secured" because you sign an entirely separate document when you buy the house: the mortgage itself. (You also sign a "note," which is the agreement to pay $X/month for X number of months until the loan is repaid, and you also sign a deed or title.) The mortgage is the document that gives the lender the right to take the house back (to foreclose) if you miss mortgage payments. That mortgage document (as well as the deed) are filed with the county register of deeds to provide evidence of the security interest. These sorts of documents are well-established legal instruments that clearly give the lender the property and security interest in the vehicle or real estate being purchased, and the means of recording or publicizing the secured interest so that other creditors or parties of interest can see that the lender has that secured interest is also well-established. (Note that the above description relates to Michigan law only; other states may have different processes and terminologies. So when is a credit card debt "secured"? And by what collateral?
When Is a Credit Card Debt "Secured" under Michigan Law?
In Michigan, a credit card debt is "secured" when it complies with the requirements of a statute called the Uniform Commercial Code, or "UCC." Article 9 of Michigan's UCC requires that, for a debt to be secured:
- The debt must originate with a written agreement that provides for a security interest in property and which contains a description of the collateral property in question;
- Some value must have been exchanged;
- The borrower must have had an ownership interest in the collateral property to begin with (I can't use your car as collateral for my loan!).
The creditor, further, must have "perfected" its lien on the property in question by filing a "UCC Statement" with the Michigan Secretary of State. If a creditor has properly accomplished all of these things, the debt will be properly secured and can be filed as a "secured claim" in a Chapter 13 or 7 bankruptcy.
Secured Claims in Bankruptcy?
The problem for credit card issuers in bankruptcy cases is that the steps have, at least in this bankruptcy lawyer's experience, almost never been properly accomplished. When a proof of claim for a credit card debt is filed in any of my clients' bankruptcy cases that claims a secured classification, the first thing I look to is whether or not the creditor has attached any documentation to the proof of claim evidencing the original writing allowing the security interest and describing the property with specificity as required by Article 9 of the UCC. 99% of the time, the creditor has attached no documentation to the proof of claim whatsoever, let alone documentation evidencing the above. I object instantly to such claims. If my objection is granted by the bankruptcy court, the creditor's claim is reclassified as unsecured or disallowed entirely (depending on what I ask for in my objection). The creditor gets paid little or nothing, and the debt is discharged in balance (or entirely). If documentation is attached, it may have some boilerplate language vaguely insinuating that a security interest is provided in the items purchased with the credit card, but it usually is not specific as to the property intended as collateral. (The reason is that the "documentation" often offered by the creditor is just a receipt from the point-of-purchase, which, typically and especially with "big box" stores like Best Buy, have been signed electronically at the credit card swiping/keypad device, without any full disclosure of terms and conditions and without the buyer/borrower affirmatively agreeing to grant any secured interest.) Without the right documentation or any documentation attached, I object to the secured classification instantly. Even if the magic documentation is properly attached, the next problem is that the creditor has almost never actually filed a UCC Statement perfecting their interest. Or, in the case of a company like Wallside Windows, who very typically attempts to claim a secured interest in windows installed in people's homes, a filing called a "fixture filing" must also be filed under the UCC, and this generally has not been done, either. No perfection of the secured interest alleged? I object. As of the date of this writing, in the full span of my career, I have never lost an objection to a credit card issuer's claim of secured classification. (That sounds impressive, but the fact is that the creditors almost never even respond to my objections and I usually get a default judgment. They know that they haven't bothered to take the right steps and that the fight isn't worth fighting.)
Credit Card Debts as Secured Debts in Bankruptcy: The Bottom Line
The bottom line regarding credit card issuers' claims that they hold secured debts in bankruptcy is that, to avoid paying money you don't have to pay to creditors who aren't legally entitled to it, you need to have hired an experienced Michigan bankruptcy attorney to assist you with your Chapter 7 or Chapter 13 matter. You need a bankruptcy lawyer who polices the proofs of claims reviewed in your case scrupulously and who isn't afraid to object to them when required. If you are a Michigan resident and would like to explore your options for a Chapter 7 or Chapter 13 bankruptcy with an experienced Michigan bankruptcy attorney, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.
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