Part of the bankruptcy process is dealing with creditors' claims. Claims in a bankruptcy case can include a right to payment or a right to have the court order someone to do or not do something.
Not all creditors and claims are treated the same in a bankruptcy case. Bankruptcy law honors the legal interests creditors have when collateral stands behind and secures a debt.
Secured Claims and Liens
A secured claim is one type of claim seen in a bankruptcy case. A claim is a secured claim to the extent that the creditor has a lien on the filer's property to ensure debt payment. This also means a secured creditor is in line for payment before unsecured creditors.
The lien or right to payment is called a security interest. Examples are mortgages on real estate and security interests in cars, trucks, boats, or other goods and equipment.
A creditor with a lien is entitled to receive value equal 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 these general rights and added 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 that 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
In a Chapter 7 bankruptcy, a debtor has three choices with secured creditors:
- Surrendering the property that secures the debt
- Reaffirming the debt
Reaffirming a debt means the filer signs and files a legally enforceable document with the bankruptcy court. The documents states the filer promises to repay all or a portion of the debt that may otherwise have been discharged in bankruptcy.
A filer may buy out a creditor using redemption, which is basically making a payment for the secured amount of the loan. For example, if someone 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 filer can redeem the vehicle for $10,500. To redeem the vehicle, the filer completes a Motion for Redemption of Collateral to file with the court and must pay the creditor right away.
In a Chapter 13 bankruptcy, a filer must either surrender secured property to the creditor or pay off the debt. The filer may choose from these options:
- Surrender the property that secures the debt
- Pay the debt to the secured creditor outside the reorganization plan
- Pay the debt to the secured creditor within the reorganization plan
Questions for Your Attorney
- If I'm a creditor, can a bankruptcy court change rights I have in a security agreement?
- Does an unsecured creditor have any rights in bankruptcy?
- Can a secured creditor ever take back its property during bankruptcy?