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To understand how secured debts are treated differently in bankruptcy than unsecured debts, it is important to understand that there are two aspects to a secured debt. A secured debt includes the personal obligations (usually the obligation to pay and to keep the collateral insured) and the security interest. The security interest is what allows the creditor to take the collateral from the debtor if the debtor does not satisfy his or her personal obligations associated with the particular debt. The personal obligations are dischargeable according to the same rules that apply to unsecured debts. However, the security interest survives the discharge in most cases. This means that, while most car loans, home loans, and other secured debts are discharged, the creditor retains the right to take the collateral if the debtor doesn't pay. In many cases, the debtor will want to retain the collateral after the bankruptcy (e.g. keep a car to drive to and from work, to take kids to school, to buy groceries, and to perform a variety of other activities for which a car is crucial). The bankruptcy law authorizes the debtor to keep the collateral through one of two mechanisms: (1) the debtor can either purchase the collateral from the secured creditor (technically known as "redeeming" the collateral from the lien) by paying to the creditor, in one lump sum payment, the value of the collateral or the amount of the discharged debt, whichever is less, or (2) reaching an agreement with the creditor (technically known as a reaffirmation agreement) pursuant to which the debtor agrees to pay the creditor a negotiated amount over a defined period of time. Redeeming the collateral will typically be impractical because the debtor will not have sufficient funds to make a lump sum payment, but some lenders (sometimes referred to as redemption financiers) offer loans (typically at fairly high rates of interest) to debtors to enable them to redeem the collateral, after which the new lender will take a new lien on the collateral and the debtor must repay the new loan. Instead, the debtor may wish to negotiate a reaffirmation agreement with the original creditor, often on terms similar or identical to the original debt that has been discharged. The creditor will retain a lien on the collateral until the debtor completes payments under the reaffirmation agreement. If the debtor fails to make all of the payments, the creditor can then repossess the collateral, sell it, and sue the debtor for any difference between the amount still owing on the debt and the proceeds of the sale (known as a "deficiency"). Some courts might permit the debtor to keep the collateral without either redeeming the collateral or entering into a reaffirmation agreement if the debtor simply keeps paying the original debt and keeps the collateral insured. This alternative, sometimes known as "ride through" is superior to both redemption and reaffirmation. It is superior to redemption because the debtor need not come up with a lump sum payment to purchase the collateral from the creditor. It is superior to reaffirmation because if the debtor later discontinues payment, the debtor will not be liable for a deficiency following the secured creditor's repossession and sale of the collateral.
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