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Non-Possessory, Non-Purchase Money Security Interest

July 9, 2012

Every profession has its “special language,” and bankruptcy law is no different. Many of the specialty terms in bankruptcy are easily understandable, and taking advantage of certain bankruptcy processes can save you money. One such term is the non-possesory, non-purchase money security interest. This is a very long and complicated-sounding term that basically means that a debt is secured by property you already owned when you made the loan. You borrowed money and secured your promise to repay with property that you did not purchase with the borrowed sum.

Small banks and finance companies often accept household items or jewelry as collateral to repay a personal loan. When the debt is not paid as agreed, the collateral can be taken and sold to pay the debt. These types of loans are generally more than a thousand dollars, but rarely exceed ten thousand. The creditor obviously does not want your property, but wants some leverage to coerce payment if you default.

When a bankruptcy case is filed, your attorney can avoid a non-possessory, non-purchase money security interest if the lien impairs a legal exemption. In plain English, if the property securing the loan can be exempted under state or federal law, the lien can be stripped away to the extend that the property is exempt. The stripped off lien becomes an unsecured debt for bankruptcy purposes and is subject to discharge. The process for stripping off a non-possessory, non-purchase money security interest is filing a Motion to Avoid Lien with the bankruptcy court.

For example, let’s say that you take a loan from a finance company for $500 and secure it with your television worth $400. If you apply your legal household goods exemption to protect the full value of your television ($400), the finance company’s loan impairs the exemption. After the bankruptcy court grants a Motion to Avoid Lien filed by your bankruptcy attorney, the television is fully protected and the creditor is left with an unsecured loan that can be discharged at the end of your bankruptcy case.

The bankruptcy laws contain many powerful provisions for protecting property. If you are in debt and need legal relief, speak with an experienced bankruptcy attorney and discover how the federal bankruptcy laws can discharge your debts, safeguard your property, and provide the financial fresh start you need.



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