LAWDOG BANKRUPTCY: CHAPTER 7

Perfection Of Security Interests

Secured Claim

Under the Bankruptcy Code, a secured claim is an allowed claim, secured by a lien on property of the debtor, or subject to a setoff. In a Chapter 7 case, a secured creditor generally receives cash equivalent to the allowed secured claim, or return of the secured property. The distribution of property to secured creditors is provided for by Section 725 of the Bankruptcy Code, reproduced for illustration purposes only here. Anyone who holds a "secured claim" or "lien" in a Bankruptcy proceeding should immediately discuss an actual case with their actual legal counsel or legal department.

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Secured Up To Value Of Collateral

A 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 collateral, and an unsecured claim for the balance. A portion of Section 506 of Title 11 of the United States Code defines a "secured claim" as:

"An allowed claim of a creditor secured by a lien on property in which the estate has an interest, or that is subject to setoff under section 553 of this title, is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property, or to the extent of the amount subject to setoff, as the case may be, and is an unsecured claim to the extent that the value of such creditor's interest or the amount so subject to setoff is less than the amount of such allowed claim."

The allowed claim is secured up to the value of the security or collateral. If the claim exceeds the value of the collateral, the insufficient portion generally becomes an unsecured claim. If the value of the collateral exceeds the amount of the claim, the creditor is not entitled to the excess amount, except as provided in this portion of Section 506:

"(b) To the extent that an allowed secured claim is secured by property the value of which, after any recovery under subsection (c) of this section, is greater than the amount of such claim, there shall be allowed to the holder of such claim, interest on such claim, and any reasonable fees, costs, or charges provided for under the agreement under which such claim arose."

A copy of Section 506 of Title 11 of the United States Code is reproduced here for illustration purposes only.

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Right To Setoff By A Creditor

In a bankruptcy action, a creditor with a state law right of setoff, may be entitled to offset a mutual debt owing by the creditor to the debtor, that arose before the commencement of the case, against a claim of the creditor against the debtor that arose before the commencement of the claim, except to the extent that:

"(1) the claim of the creditor against the debtor is disallowed;

(2) the claim was transferred, by an entity other than the debtor, to the creditor after the commencement date of the bankruptcy filing; or within 90 days before the filing of the bankruptcy while the debtor was insolvent; or the debt owed by the debtor to the creditor was incurred within 90 days before the filing of the bankruptcy and for the sole purpose of obtaining a right of setoff against the debtor."

A copy of Section 553 of Title 11 of the United States Code is reproduced here for illustration purposes only.

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Statement Of Intention

In a Chapter 7 case, an individual debtor with secured consumer debts, such as a personal automobile loan, must file a Statement of Intention to retain or surrender the collateral. The debtor may elect to return or redeem the property, or reaffirm debts secured by the collateral. This Statement of Intention must be filed by the date of the 341 Meeting, or within 30 days after filing the petition, whichever occurs first. Within 45 days after filing the Statement of Intention, the debtor must actually implement the intent, by returning, redeeming, or reaffirming. See Statement of Intention here. Link does not return to this page.

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Adequate Protection

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 maintenance 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.

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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. This may be extended to a 20 day period where a purchase money security interest is involved. See Section 547(e)(2)(A) linked here. Link does not return to this page.

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