Nonpurchase-money loans (NPM loans) occur when a business loans you money and in exchange, they have you list various pieces of property (TV, furniture, stereo, jewelry, etc.), that you already own, as security or collateral for the loan. Additionally, they charge you an extremely high interest rate on the loan (i.e. “legal loan shark”)!
Since you’ve listed property as collateral for this loan, it then becomes a “secured” loan and the lender has a lien against the property you listed as security.
While normally with secured loans, you can’t file bankruptcy and simply wipe out this debt while keeping the property that you listed as collateral, the lawmakers absolutely got it right when dealing with these NPM loans!
The bankruptcy code provides that these NPM loan liens on your property can be “avoided” when you file for bankruptcy. This means that when you file a bankruptcy, you can wipe out (i.e. “discharge”) the loan, while still keeping the property you listed as security/collateral!
While the text of the bankruptcy law(s) which allow you to avoid these types of liens is included at the end of this blog, the specific law is 11 U.S.C. §522 (f)(1)(b)(i).
Beware of what these types of lenders may say to you about these debts. They often tell clients that they cannot discharge these debts in a bankruptcy or that they will come to take the property that was listed as collateral. Obviously, both of these are completely untrue!
Lastly, since your bankruptcy attorney will need to file a separate “Motion to Avoid Lien” to accomplish this, it is very important to tell your attorney if you listed property, that you already owned, as security or collateral for any loans.
11 U.S.C. §522 (f)(1)(b)(i) = …Notwithstanding any waiver of exemptions but subject to paragraph (3), the debtor may avoid the fixing of a lien on an interest of the debtor in property to the extent that such lien impairs an exemption to which the debtor would have been entitled under subsection (b) of this section, if such lien is … a nonpossessory, nonpurchase-money security interest in any … household furnishings, household goods, wearing apparel, appliances, books, animals, crops, musical instruments, or jewelry that are held primarily for the personal, family, or household use of the debtor or a dependent of the debtor;