Secured Claims and Liens in Bankruptcy

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When a person or business files for bankruptcy, creditors file claims for payments on the debts they're owed. It's likely at least some claims will only be paid in part, or not at all. Claims aren't treated equally. Some, called secured claims, go to the front of the line for payment.

Secured claims are backed by your property, and there's usually a lien securing the creditor's right to payment. There are different types of liens, and some legal steps a creditor must complete to confirm secured status.

Secured Claims and Liens

A secured claim is one type of claim that gives the creditor a lien against your property to be paid to cover the amount owed.

A lien is an interest in real or personal property securing a debt. Familiar examples of liens include a mortgage on real estate and a security interest in a car, truck, boat, television set or other item of property.

Two Secured Lien Types: Voluntary and Involuntary

Secured claims may be based on either voluntary or involuntary liens, which can be an interest in real or personal property.

Voluntary Liens

Voluntary liens are created by agreement between your and the creditor. An example of a voluntary lien is a mortgage on a house. These contracts or security agreements are often part of financing a purchase. A car loan is a good example. Business owners might have a security agreement for machinery or equipment.

Involuntary Liens

Involuntary liens are created without your consent. There are three major types of involuntary liens:

  • Judicial liens - these are created by a legal process, such as a court's judgment in favor of a creditor
  • Statutory liens - a law creates the lien, such as a mechanic's lien against a home to ensure a contractor is paid
  • Tax liens - the government can have a lien put on your property if you owe taxes

Dividing a Creditor's Claim

The debt owed to a creditor can be divided into secured and unsecured claims. This can happen when the collateral property isn't worth enough to cover the entire amount owed. The balance would be an unsecured claim.

Getting Secured Status and Perfecting a Lien

Perfecting a lien means a creditor completes the legal steps found in state law to confirm its interest and claim status. A basic reason for perfecting a lien or security interest is to give everyone notice of the creditor's rights against loan collateral. Perfecting a lien is an important part of protecting a secured creditor's interest in property.

The steps that must be taken to perfect a lien may differ from state to state, and depend on the type of property. Generally, a mortgage is perfected by recording it with the county recorder and a lien against personal property is perfected by filing a financing statement with the secretary of state.

A perfected lien is senior or superior to any liens that arise after perfection. An unperfected lien may be avoided or cancelled by the bankruptcy trustee. A court must rule that the lien no longer binds the property.

Creditors with secured claims are commonly referred to as secured creditors and they usually have greater rights and leverage in a bankruptcy case.

Questions for Your Attorney

  • Can a decision to disallow a secured claim be appealed?
  • How is a claim handled where only a portion of it is secured?
  • Can I fix any problems with perfection of a lien and save my secured claim status?
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