Bankruptcy Lawyer Bryan W. Stone answers the question “What is Chapter 11 Bankruptcy?”
If you are in debt and being hounded by creditors morning, noon and night, you may not know and likely don’t care which are secured and which are unsecured. When you’re dealing with calls and letters demanding payment, you will likely base your decisions on who is yelling the loudest or causing the most commotion. Though this may work pre-bankruptcy, the rules change post-bankruptcy. Officially filing for bankruptcy not only offers the debtor certain protections, but it also offers protection for creditors. To find out more about the difference between secured and unsecured creditors and what this can mean in the context of a bankruptcy case, keep reading.
First, secured creditors are those that have a lien against something, an asset or piece of property. A great example of a secured creditor is the mortgage company. The mortgage company gave you a loan for the house, and if you fail to pay, it can foreclose on the property. Auto loans are also usually secured, as are tax debts, because the government can always file a lien against your assets to ensure repayment. These liens work to secure the creditor’s risk, by allowing them to seize items of value to repay loans that go bad.
Unsecured creditors are those who loan money to individuals without the ability to grab property if the loan isn’t repaid. These creditors give money based purely on your promise to repay. For instance, your credit card company cannot repossess your car or foreclose on your house if you refuse to pay. Same goes with your doctor’s office or hospital, they cannot seize assets in the event of nonpayment.
Under-secured creditors are another quasi-category of creditors located somewhere between secured and unsecured. Under-secured claims involve those where collateral exists, but the collateral has fallen in value and is now worth less than what the creditor is owed. A good example would be a luxury vehicle with a $70,000 loan, but whose value has now dropped to only $50,000.
Who gets paid first?
When you file for bankruptcy protection, the secured creditors will always receive payment first. This rule is written into the bankruptcy laws, placing the secured creditors’ interest above that of the unsecured creditors. This means that if a bankruptcy trustee sells property to pay off debts, the money will go to the secured creditors before it goes to the unsecured creditors. As for under-secured creditors, the difference in the value of the assets and what is owed often is treated as an unsecured debt, while the remaining value of the item is treated as secured.
Other rights of secured creditors
Additionally, secured creditors will retain the right to take property away from you that you don’t pay them for. The way to hold on to this property in a bankruptcy is to reaffirm the debt, meaning that both you and the creditor sign a new agreement saying that you promise to keep paying them as if you had never filed bankruptcy and that, should you fail, the creditor has the right to take the property away.