Bankruptcy Basics: What Is A Secured Creditor?

by Karen Oakes, Esq.

April 24, 2007

A secured creditor is a creditor who claims a security interest in property. Property can be real or personal. Real property is land and anything attached to it (like a house). Personal property is stuff you own. Real property secured creditors are mortgages or judgments/liens which have attached to the real property a debtor owns. Examples of personal property secured creditors would be auto lenders or pawn shops.

In order to be valid, a security interest must be “perfected.” That doesn’t mean it gets a “10” on the beauty scale. Perfection is accomplished when the creditor has done everything that the law tells them they have to do in order to be “perfected”. Each state has different requirements. Usually, there has to be some kind of notice to the public that this “property”, whatever it is, has a lien attached to it. Mortgages are recorded at the county clerk’s office. Car titles are on file at the Dept. of Motor Vehicles. The Secretary of State’s Office files lien notices called UCC filing statements (Uniform Commercial Code).

Because “secured” creditors have greater rights than “unsecured” creditors, they get paid in a different ways in a bankruptcy. If secured creditors do not get paid, sometimes they can take the property on which they have placed a lien. It all depends on the state, the federal law, the U.S. Bankruptcy Code, and whatever other statutes are relevant. This area causes more problems than any other in bankruptcy court.

In chapter 7, a debtor has three choices with secured creditors: surrendering the property that secures the debt; reaffirming the debt (Mr. Creditor, this bankruptcy doesn’t exist any more between you and me), or redemption. Before the law change, there was another option: “keep and pay”. As long as the payments were current, the debtor got to keep the property. The state of the law is uncertain right now.

In Chapter 13, a debtor has different choices with secured creditors: surrendering the property that secures the debt; paying the debt outside the reorganization plan; or paying the debt within the reorganization plan (either as it exists, lowering the value, perhaps even lowering the interest rate, or some combination of lowering amount due/interest rate due).

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I'm a consumer protection lawyer in Oregon, working with people in Klamath; Lake; Jackson; Josephine; Curry; and Deschutes County. I speak regularly on bankruptcy and consumer protection issues nationwide.

Last modified: April 27, 2007