Help! A Non Purchase-Money Security Interest is Holding My Household Goods Hostage!

Published Tuesday, June 30, 2009 @ 8:30 pm

Many of us encounter purchase-money security interests when we buy a car or perhaps shop at department stores. This is the situation where a lender gives you money to buy a specific item (a car; a tv, a bedroom set, etc.) and in exchange you give him a lien on the property, allowing that property to secure the debt as collateral. The other kind of consensual lien, the non purchase-money security interest, apart from being a mouthful, is somewhat less common. You’re likely to come across it if you’ve been given a small loan from a store front lender such as American General or Beneficial. These lenders will secure the loan by getting you to sign over a lien on your household goods. So what happens if you run into problems and can’t afford to pay back the loan? Will bankruptcy help in these situations?

The short answer is: Yes. When you signed over that lien to your household goods, you mostly gave the lender leverage. You see, he doesn’t actually want your stuff. That’s that the nature of our personal belongings; they’re usually worth a lot more to us than to anyone else. The most “valuable” thing the guy has is the ability to make you fear that he can take your stuff away. That’s really all they’ve got.

Under provisions of the bankruptcy code, you will be able to remove a non purchase-money lien from household goods. The definition of household goods include, among others items, your clothes, your household furnishings, household appliances, kitchenware, linens, some household electronics, medical equipment, personal effects including wedding rings, and one personal computer with its attachments. Any non-purchase money security interest in these items can be avoided and the underlying unsecured debt will be discharged with the rest of your debts.

Let’s say you’ve offered items as collateral which are not included in the above list, such as expensive electronics or antiques. In these situations, the non-purchase money security interest can be avoided to the extent which it impedes an exemption you would otherwise be entitled to under state law. Depending on what the item of collateral is, if it is exempt under state law, the lien can likely be avoided.

Even if the property is not a household good, and not otherwise exempt under state law, your options in bankruptcy are far better than continuing to pay the debt outside of bankruptcy. First, you can pay the lender for the yard sale value of the items (which is often much less than the loan amount). In a Chapter 7 you’ll have to do it in a lump sum, while the Chapter 13 will allow you to pay out the value over the course of your plan. This is a pretty good solution for you: you will get to wipe out the debt you owe by paying a much smaller amount.

And what if this doesn’t work? Then you still have one more option: call the creditor on his bluff. You should leave this one for last, but think about it: is he really going to show up at your house to extricate the nonexempt items from the exempt ones? Well, theoretically, legally, it’s entirely possible. Realistically? That’s looking a whole lot less likely. These guys might be holding your stuff hostage contractually, but enforcing that contract will likely be more trouble to him than it’s worth. If you find yourself at the mercy of a store front lender, contact a bankruptcy attorney immediately.

In North Carolina, contact the Law Offices of John T. Orcutt to set up a free initial debt consultation. Call 1-800-899-1414 today.

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