Secured Claim in Bankruptcy - Definition

Primary mortgage lenders tend to have secured claims in bankruptcy.

Secured claims are among the debts that have top priority in terms of being repaid in a bankruptcy case. Secured claims are loans that were granted to debtors in exchange for the creditor attaching a lien on real or personal property. Creditors that placed an involuntary lien on property to recover debt payments also have secured claims. Secured claim status affects how the claim is treated and the rights that can be asserted in bankruptcy.

Perfection of the Lien

Perfecting the lien on property means the creditor establishes its right to the property if the debt is not paid and establishes the order in which the creditor will be paid if there are any junior liens. Typically, liens on real property have to be recorded with the county recorder's office. Liens on motor vehicles have to be registered with the state's Department of Motor Vehicles. When the lien is not perfected, it is possible for the debtor to contest the secured claim status of the claim in certain circumstances.

Adequate Protection

When debtors choose to keep the property after filing for bankruptcy, the creditor needs assurances they will keep receiving payments. The Chapter 13 plan must state the debtor's intent to continue paying the loan during the bankruptcy. The creditor can also request the debtor provide proof of insurance coverage for the property. Submitting a copy of the property's insurance declaration page is adequate proof that the property is currently insured. Usually, the declaration page lists the type of coverage, the deductible amounts, the insurance limits, and will state the creditor is a lien holder for the property.

Fair Market Value of the Collateral

The secured amount of the creditor's claim is based on the fair market value of the property on the date of bankruptcy filing. If the amount of the claim exceeds the value of the collateral, the creditor is entitled to receive payment for at least the fair market value of the property. The remaining loan amount can be discharged in the bankruptcy as unsecured debt. Chapter 7 debtors request to pay a creditor only the fair market value for a financed car by filing a motion to redeem the property. Chapter 13 debtors file "cram down" motions to pay a creditor the amount of the property's market value. Bankruptcy attorneys advise their clients if exercising those options is feasible based on the facts of the case.

Motion for Relief Automatic Stay

Secured creditors file motions for relief from automatic stay when their property is not adequately protected by the debtor. When the debtor stops making loan payments, the creditor requests the court remove the property from the protection of the bankruptcy so that it can pursue its legal options based on the contractual agreement with the debtor. When the motion is granted, the creditor can repossess the property. Alternatively, the property remains under bankruptcy protection if the debtor signs a stipulated agreement of adequate protection outlining a monthly payment schedule to become current with the account.

References

• Cornell University Law School: Title 11 Bankruptcy
• Lawdog.com: Secured Claim
• Turnaround Management Association: Adequate Protection