Finance companies offering short-term loans often require borrowers to pledge personal property as collateral for the loan. When you pledge property you already own as collateral, you grant the finance company a security interest in it, which means the finance company can demand that you turn over the property if you default on the loan. This type of security interest is known as a non-purchase money security interest, because the loan was not made for the purchase of the collateral. Most finance companies do not actually want your property, but they know the mere threat of taking it might be enough to get you to pay.
When you file for bankruptcy, you have the opportunity to eliminate non-purchase money security interests in your personal property through a process known as lien avoidance. If you have pledged any of the following types of property as collateral for a loan, you may be able to avoid the lien:
- Household goods and furnishings
- Musical instruments
- Health aids
- Tools of the trade
Some borrowers pledge vehicles as collateral for a loan. Unfortunately, bankruptcy law does not allow debtors to avoid non-purchase money liens on vehicles, unless the vehicle qualifies as a tool of the trade. You also cannot avoid a lien if the loan proceeds went toward the purchase of the collateral. An experienced Maryland and Washington DC bankruptcy attorney can determine whether any of your secured debts are eligible for lien avoidance.
In order to avoid a non-purchase money lien in bankruptcy, it must also be non-possessory, which means the collateral remains in your possession. Pawn loans, for example, would not be eligible, because the pawnshop retains possession of the collateral. Additionally, you must be able to claim the collateral as exempt in your bankruptcy. If you can fully exempt the collateral, you may be able to avoid the entire lien. If the collateral is only partially exempt, however, you can only avoid the lien to a certain extent. A knowledgeable Washington DC and Maryland bankruptcy lawyer can determine your eligibility for state and federal exemptions, as well as which set of exemptions will best protect your property.
When you avoid a non-possessory, non-purchase money lien in Chapter 7 or Chapter 13 bankruptcy, the lender no longer holds a security interest in your property. Regardless of how much you owed on the loan when you filed for bankruptcy, the lender cannot take the property you pledged as collateral. Avoiding a lien typically requires filing a special motion with the bankruptcy court. A qualified Washington DC and Maryland bankruptcy attorney can assist you with the entire lien avoidance process.