Secured Claims and Liens

Secured claims include liens, security interests, security agreements and secured claims. An allowed claim secured by a lien on property in which the estate has an interest, or that is subject to setoff, is a secured claim to the extent of the value of the creditor's interest in the estate's interest in the property or the amount subject to setoff. A secured claim carries the right to adequate protection of collateral. Unavoided liens survive bankruptcy but circumstances may demand action by a secured creditor to protect the lien.

A claim cannot be a secured claim unless it is secured by a lien on some specific item of property in which the estate has an interest, or, alternatively, is a claim that is subject to a right of setoff. A claim may be a secured claim regardless of whether the relevant lien was created by agreement, statute, common law, equity, or judicial process.

Two Types of Secured Claims

There are two types of secured claims: (1) voluntary or consensual secured claims, each created by agreement between the debtor and the creditor and (2) involuntary secured claims, such as a judicial or statutory lien, which are fixed by operation of law and do not require the consent of the debtor. Common examples of voluntary or consensual liens include real property mortgage liens, liens arising from deeds of trust, and security interests recognized under the Uniform Commercial Code. Examples of statutory liens include federal tax liens and municipal real property tax liens.

How Secured Claims are Paid

Secured claims are paid from the proceeds of the collateral. If the collateral is insufficient to pay the claim in full, the balance becomes an unsecured claim.

Rights of Creditors

Secured debt usually includes the right of the creditor to seize identifiable property if there is a default, in addition to the promise or ability of the debtor to pay. In a Chapter 7 case, a secured creditor generally receives cash equivalent to the allowed claim or a return of the secured property.

The secured claim is generally considered secured only to the extent of the value of the particular collateral. If the allowed claim of the creditor is greater than the value of the collateral, the claim may be divided into a secured claim, up to the value of the collateral, and an unsecured claim for the balance.

Copyright 2012 LexisNexis, a division of Reed Elsevier Inc.