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Claims
LAWDOG is intended to assist in the understanding of basic concepts. See Disclaimer. Always obtain legal advice from legal professionals.
Allowed Claims
Secured Claims
A Creditor's Right To Setoff
Unsecured Claims
Under Section 101, the term ''claim'' has a broad meaning, and includes a right to payment, "whether or not such right is reduced to judgment, liquidated, fixed, contingent, unmatured, disputed, legal, equitable, or secured". A claim may also consist of a right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, "whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured". A claim against the debtor includes claims against property of the debtor. See Section 101 (5) reproduced here for illustration purposes only.
A claim or interest, proof of which is filed under Section 501 (Proof of Claim), is deemed allowed, unless a party in interest objects. If there is an objection, a court hearing is held, and the court determines the amount of claim as of the date of bankruptcy filing. A claim is not allowed if it is unenforceble because the debtor has a valid defense to the claim, or if the claim is for post-petition interest on an unsecured claim, or other exceptions. See Section 502 of the Bankruptcy Code, reproduced for illustration purposes only here.
Claims in a bankruptcy action may be either secured or unsecured. An allowed setoff is treated as a secured claim.
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. 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."
If the value of the collateral exceeds the amount of the claim, the creditor may not be 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 is reproduced here for illustration purposes only.
In a Chapter 7 case, a secured creditor generally receives cash equivalent to the allowed claim, or a 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.
An example of a secured claim is a note secured by a deed of trust or mortgage on real property. A secured creditor has a right to "adequate protection" of its interest in the collateral if it is subject to the automatic stay, and relief from stay has not been ordered. This may protect the secured creditor from decreases in the value of security during the Bankruptcy case. See Adequate Protection linked here. Link does not return to this page.
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.
A creditor's right to setoff is subject to the automatic stay, and is treated as a secured claim under the Bankruptcy Code. An illustration of a setoff is a banking institution holding funds in an account of the debtor, who also owes money to the bank for loans. State law may allow the bank to use funds in the account to offset loans owed by the debtor on the Bankruptcy filing date. The creditor with a right of setoff under state law, 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.
For the purposes of Section 553 of the Bankruptcy Code, the debtor is presumed to have been insolvent on and during the 90 days immediately preceding the date of the filing of the petition. The trustee may in certain circumstances recover from a creditor all or a portion of the amount offset, if a creditor offsets a mutual debt owing to the debtor against a claim against the debtor on or within 90 days before the date of the filing of the petition. See Section 553(b)(1) reproduced for illustration purposes only here.
The automatic stay provisions of Section 362 (a) (7) apply to "the setoff of any debt owing to the debtor that arose before the commencement of the case under this title against any claim against the debtor..." Therefore, a creditor must obtain relief from stay before using any right to setoff after the filing of a Bankruptcy. A secured creditor generally has a right to "adequate protection" of its interest in the collateral if it is subject to the automatic stay, and relief from stay has not been ordered. A copy of Section 553 is reproduced for illustration purposes only here.
Unsecured debt may be generally described as a debt where credit was granted based solely upon the promise or ability of the debtor to pay. Claims that are not secured by any collateral or subject to setoff are generally unsecured claims. For purposes of bankruptcy, unsecured claims are classified and paid based on a priority list described in Bankruptcy Code Section 507. See LAWDOG "Priority Of Payment". Link does not return to this page.
