The person, corporation or other entity that has filed a bankruptcy case is called the debtor. A creditor is any person, corporation or other entity to whom the debtor owed a debt on the date the bankruptcy case was filed.

Claims in a bankruptcy action include a right to payment or a right to a court-ordered remedy because a debtor did not abide by a contract. A claim against the debtor includes claims against property of the debtor.

Secured Claims and Liens

A secured claim is one type of claim. A claim is a secured claim to the extent that the creditor has a lien on property of the debtor. A lien gives the creditor the right to be paid from that property before creditors who do not have liens on the property. A lien is an interest in real or personal property which secures a debt.

Secured Claims & Liens that Survive Bankruptcy

The secured claims and liens that are owed after a bankruptcy case is closed are usually debts that are secured with property or that the government has secured, such as student loans. In the case of student loans, these can be discharged only in very extreme circumstances. For example, a student loan may be discharged if the debtor is disabled and will never be able to hold down a normal job in order to repay that debt.

Avoidable Liens

Some liens held by secured creditors, although enforceable outside bankruptcy may be avoided or eliminated in bankruptcy, leaving the creditor unsecured. Lien avoidance turns secured liens on property into unsecured liens. The power to avoid liens modifies the general rule that liens are not affected by bankruptcy.

Exemptions

Some property is exempt so it is removed from the bankruptcy estate and is not available to pay the claims of creditors. Exemptions are the lists of the kinds and values of property that is legally beyond the reach of unsecured creditors or the bankruptcy trustee. What property may be exempted is determined by state and federal laws. The debtor in bankruptcy keeps the exempt property for use in making a fresh start after bankruptcy.

Some secured claims and liens can be avoided or eliminated if they interfere with an exemption claimed in a bankruptcy case, while others survive bankruptcy. A secured claim or lien interferes with an exemption if it would leave less than the debtor is entitled to. For example, most judgment liens that have attached to the debtor's home can be avoided if the total of the liens is greater than the value of the property in which the exemption is claimed.

Avoidance Powers

Avoidance powers are rights given to the bankruptcy trustee to eliminate liens that were created just before the bankruptcy petition was filed or to reverse a transfer of assets by the debtor to friends or relative for less than their fair value or those that prefer one creditor over another.

Questions for Your Attorney

  • How can a secured claim be avoided in bankruptcy?
  • What secured claims and liens cannot be avoided in bankruptcy?
  • Can a student loan be avoided in bankruptcy?