Occasionally a client is under a misconception that a Chapter 7 bankruptcy discharge will erase all creditor interests in secured property. In other words, after the bankruptcy there is no house loan or car loan, and the debtor is able to keep the house or car.
A Chapter 7 discharge acts as a permanent court injunction prohibiting the collection of debts incurred prior to filing the bankruptcy case. The discharge order stops creditor action against the debtor personally – no more lawsuits, phone calls, or collection letters. However, the creditor may pursue any legal claim against a debtor’s property.
To understand a collection action against a debtor’s property (called an “in rem” action), let’s examine a typical auto loan. The creditor and the debtor enter into a contract wherein the debtor personally promises to make payments on the loan and the creditor promises to not repossess the car as long as these payments are made.
