How Can I Clear Secured Loan Debts?

You can clear secured loan debts by negotiating directly with the lender or through bankruptcy. Secured debts are tied to collateral such as real estate or automobiles. The lender will not release the collateral unless the loan balance is paid. Clearing or settling the secured loan could mean forfeiting the collateral and making an additional payment as well.

Voluntary Reposession

Some people voluntarily default on secured loans, allowing their home, automobile or other collateral to be taken by the lender. The property is sold at auction or through a private sale, with the proceeds applied to the loan balance.

Strategic Default

So-called "strategic defaults" occur in real estate when people voluntarily walk away to clear the secured debt. In most cases they have decided they no longer want the home because it has significantly declined in value or the neighborhood has deteriorated -- or both. Voluntary repossessions are so common on auto loans that some lenders offer appointments for turning in the car.

Deficiency Judgments

Surrendering the collateral doesn't always clear a secured debt. You may be held responsible for any balance remaining after the sale or auction of the property. This can lead to a lawsuit and a so-called "deficiency judgment." Example: Your foreclosed home is sold for $250,000 at auction, but you owed $275,000 on the mortgage. In most states this allows the mortgage company to file a lawsuit against you for the remaining $25,000.

Bankruptcy

Bankruptcy can be used to clear secured debt but should be used as a last resort. Chapter 7 bankruptcy and Chapter 13 are popular forms of bankruptcy and can clear secured debt by allowing the collateral to be foreclosed or repossessed by the lender. Deficiency judgments are not possible in bankruptcy. After the property is surrendered any remaining balance is treated as unsecured debt and eliminated, or discharged through the bankruptcy.

Alternatives

Avoid bankruptcy and judgments by selling properties yourself, if possible. You cannot transfer ownership of secured property until the balance on the loan is satisfied, however. That means you must create a strategy for selling the property and paying any remaining balance. This could be a long-range strategy as you gather the money needed for paying an anticipated balance. Clearing your secured debts in this manner will protect your credit and allow you to avoid bankruptcy.