When your business' creditors are hounding you for payment, you might not worry too much about which debts are secured and which are unsecured. Your order of payment probably depends on who threatens the loudest. If you file for bankruptcy, however, these terms can make a big difference - both for your creditors and for you.
Secured Claims Involve Collateral
Secured claims are those where your business' creditors have a lien against your business or its property. If you bought the building where your company does business, this is a claim secured by the mortgage you took against it. If you don't pay the mortgage, the lender can foreclose on the building.
Loans taken to buy company vehicles are also secured claims. The cars or trucks are collateral that can be repossessed if your business doesn't pay. Taxes are usually considered to be secured claims, because the IRS can place a lien against your company's assets for non-payment.
Unsecured Claims Lack Collateral
Unsecured claims are those where the lender can't reclaim property. These creditors lent your business money based only on its promise to pay. Suppliers are unsecured claimants. They can't take their merchandise back if your company doesn't pay, because you've probably already sold it or used it. A company credit card is also an unsecured claim; the creditor can't repossess what your company purchased with the card.
Under Secured Creditor
Some business bankruptcy claims are neither secured or unsecured. They are under-secured. In this situation, the lender has collateral, but the collateral has depreciated in value. Because the collateral is used, it's worth less than what the lender is owed for it.
Secured Claims Are Paid First
When you file for bankruptcy, your business' secured creditors receive payment first. If you file for Chapter 7, they get their collateral back. If the loan was under-secured, the difference between the value of the collateral and what your business owes usually becomes an unsecured debt. If your business is a corporation or partnership, and is filing for Chapter 7, bankruptcy doesn't always erase its unsecured and under-secured claims.
If the bankruptcy trustee does not raise enough money to pay off these claims by selling all your business assets, your company will be responsible for paying them if it ever goes back into business. If your business files for Chapter 11 instead, you agree to a repayment plan to satisfy all your creditors. Any outstanding debts that remain at the end of the plan are usually erased.
A Business Bankruptcy Lawyer Can Help
The law surrounding secured, unsecured and under-secured claims in business bankruptcy is complicated. Plus, the facts of each case are unique. This article provides a brief, general introduction to the topic. For more detailed, specific information, please contact a bankruptcy lawyer.