The person or business that has filed a bankruptcy case is called the debtor. A creditor is any person or business that is owed a debt from the debtor 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 directing parties to do or not do something.

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 that gives the creditor the right to be paid from that property before creditors who do not have liens on the property.

A lien is a form of security interest over an item of property to secure payment of a debt or performance of another obligation. Examples of liens are a mortgage on real estate and a security interest in a car, truck, boat, television set or other item of property.

A creditor with a lien is entitled to receive value equivalent to at least the amount of the debt or the value of the collateral, whichever is smaller. An unsecured creditor has no such rights.

General Creditor Rights

Creditors with secured claims usually have greater rights than unsecured creditors in a bankruptcy case. However, all creditors have some general rights in a bankruptcy case. Creditors are entitled to:

  • Share in any payment from the bankruptcy estate according to the priority of their claim
  • To be heard by the court in matters dealing with the debtor's plan or the liquidation of the debtor's nonexempt assets
  • To challenge a debtor's right to a discharge or a discharge of the creditor's particular debt

Secured creditors have the above listed general rights plus additional rights.

Specific Rights of Secured Creditors

In bankruptcy, secured creditors are much better off than unsecured creditors. Secured creditors have a lien giving them specific rights to the property which is the collateral for their claim. The specific rights are generally created by one of the following:

  • Deed of trust or mortgage on real property
  • Security agreement on personal property, such as a car 
  • Judgment lien

Secured Creditor Protections

Generally secured creditors are entitled to:

  • Stop the debtor from using cash collateral
  • Money if the trustee's use of the secured property might lower its value
  • Attorneys' fees and interest that accrue or arise both before and after the bankruptcy case begins

Chapter 7

In a chapter 7 bankruptcy, a debtor has three choices with secured creditors:

  • Surrendering the property that secures the debt
  • Reaffirming the debt
  • Redemption

Reaffirmation

Reaffirming a debt means the debtor signs and files a legally enforceable document with the bankruptcy court. The documents states the debtor promises to repay all or a portion of the debt that may otherwise have been discharged in bankruptcy.

Redemption

A debtor may buy out a creditor using redemption, which is when a debtor gives secured collateral in return for an amount equal to the secured part of the loan. For example, if a debtor has a vehicle worth $10,500 with a $20,000 loan, the secured portion of the loan is $10,500 and the unsecured portion is $9,500. The debtor can redeem the vehicle for $10,500. To redeem the vehicle, the debtor would need to file a Motion for Redemption of Collateral and be prepared to buy out the secured lender right away.

Chapter 13

In a chapter 13 bankruptcy, a debtor must either surrender secured property to the secured creditor or pay off the debt to the secured creditor. The debtor may select one of the following options when it comes to secured creditors:

  • Surrendering the property that secures the debt
  • Paying the debt to the secured creditor outside the reorganization plan
  • Paying the debt to the secured creditor within the reorganization plan

Questions for Your Attorney

  • Can I try to collect on a judgment after the debtor files bankruptcy?
  • Does an unsecured creditor have any rights in bankruptcy?
  • Can a secured creditor ever take back its property during bankruptcy?