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Secured Claim
LAWDOG is intended to assist in the understanding of basic concepts. See Disclaimer. Always obtain legal advice from legal professionals.
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. A secured claim under the Bankruptcy Code is an allowed claim, secured by a lien on property of the debtor, or subject to a setoff. The secured claim is generally secured only to the extent of 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 collateral, and an unsecured claim for the balance. See Section 506 (a), reproduced here for illustration purposes only.
Anyone who holds a "secured claim" or "lien" in a Bankruptcy proceeding should immediately discuss an actual case with their actual legal advisor or legal department.
A creditor which is only partially secured under Section 506(a) of this title, may elect under Chapter 11 to have such claim treated as secured claim to the full extent that such claim is allowed. This is sometimes referred to as a Section 1111 (b) Election. Instead of holding a secured claim, up to the value of collateral, and an unsecured claim for the balance, the creditor is treated as holding a secured claim for the full allowed claim. See Section 1111 (b) reproduced here for illustration purposes only.
This election must be made prior to the conclusion of the hearing on the disclosure statement, or within such later time as the court may fix. See Bankruptcy Rules Rule 3014 reproduced here for illustration purposes only.
For each allowed secured claim provided for by the Chapter 11 plan, the debtor must obtain the consent of the secured creditorto retain the collateral, surrender the collateral, or generally, pay the allowed secured claim in full, with interest, over the life of the plan. More specifically:
(1) The secured creditor retains lien on the property, or the proceeds of the property, and receives payments in deferred installments totalling at least the amount of the allowed secured claim, and having a present value, as of the date of the effective date of the plan, of at least the value of the collateral. If an election under Section 1111 (b) has been made, the deferred installments above must total at least the entire allowed amount, and have a present value, as of the date of the effective date of the plan, of at least the value of the collateral, or
(2) The secured creditor must receive the "indubitable" equivalent of its secured claim. See Section 1129 (b)(2), reproduced here for illustration purposes only.
A secured creditor may have a right to protection of certain property interests under Section 361 of the Bankruptcy Code. "Adequate protection" is required where the collateral is subject to the automatic stay, and relief from stay has not been ordered. See Section 362 (d) (1) reproduced here for illustration purposes only. It is also required where the property is sold, used or leased by the trustee or debtor-in-possession, and where the Court may authorize equal or senior indebtedness in the same collateral. See Section 363 (e) reproduced here for illustration purposes only.
For liens obtained by the creditor in the debtor's assets before the Bankruptcy filing, the creditor may seek adequate protection or seek relief from stay to execute on the collateral. Adequate protection may be provided by methods such as periodic cash payments, additional or replacement liens, or other relief which supplies the "indubitable equivalent" of the creditor's interest. Adequate protection may also include maintainance and insurance. "Adequate protection" protects the secured creditor from a decrease in the value of the creditor's interest in such property during the bankruptcy case. See Section 361 reproduced here for illustration purposes only.
A debtor in possession may not use "cash collateral," such as proceeds from pledged inventory, equipment, or accounts subject to security interests, and other cash equivalents, without the consent of the secured party or Court authorization. Adequate protection may be needed in this situation. See Section 363 (c) (2) reproduced here for illustration purposes only.
Perfection of Security Interests
The perfection of an interest in property may not be prohibited by an automatic stay if it occurs during the 10-day grace period provided by Section 547(e)(2)(A), or under other limited situations. The period may be extended for purchase money security interest transactions that are perfected on or before 20 days after the debtor receives possession of such property. Purchase money security interests that secure new value given by the secured party to enable the debtor to acquire property, and in fact used by the debtor to acquire property described as collateral in the security agreement may meet the requirements of Section 547 (b) (3) . The filing of a continuation statement to maintain secured status of the creditor may be permitted by Section 362(b)(3). See Portions of Section 547 reproduced here for illustration purposes only. Always discuss actual cases with your actual legal advisor or legal department.
Also see A Creditor's Right To Setoff, linked
here. Link does not return to this page.
