Distinguishing Between Secured and Unsecured Claims in Bankruptcy

Secured and Unsecured Claims are treated slightly differently in Chapter 7 liquidations verses a Chapter 13 reorganization or a Chapter 11 corporate reorganization. In a Chapter 7, the Debtor generally discharges all unsecured debts and does not have to pay on any of these debts. The exception is if the debt is non-dischargeable (such as a tax debt, student loan, etc.) and in that case the debt remains. The Debtor also has the option in a Chapter 7 of keeping their secured collateral and paying on the same terms and conditions, surrendering the collateral back to the lender and discharging any deficiency, or redeeming the collateral by paying the entire note balance. On the other hand, in a Chapter 13 and Chapter 11, unsecured debts are generally not completely discharged and usually are paid a small portion or are paid in full—it all depends on how much funds there are going into the Plan of Reorganization toward unsecured debts. Secured debts can be surrendered (like a Chapter 7) and then any deficiency becomes an unsecured debt or the Debtor can retain the collateral and pay on the same terms or negotiate with the lender and pay on different terms, which are usually much more favorable to the Debtor..

Secured  transactions are ones in which the lender only agrees to lend funds in exchange for some security interest in collateral put up by the Debtor to secure the deal. The most common example, of course, involves the sale of real estate (but also occurs in automobile sales and equity lines of credit to name a couple). Most individuals or corporations cannot afford to purchase real property without obtaining financing. Banks and other lending institutions will not lend such large amounts without the assurance that, if the Debtor defaults, they can convert the value of the collateral to pay off some, if not all, of the unpaid portion of a loan.

By contrast, companies and individuals offer unsecured loans for credit card purchases, education loans, or personal (signature) loans. The lender knowingly takes a bigger risk and generally only loans smaller amounts at higher interest rates in such deals. Accordingly, these unsecured claim holders have a reduced expectation of procuring a superior rate of return in the case of default.

Secured claim holders, on the other hand, have the leverage created by the borrower’s preference to maintain use and ownership of the collateral throughout the course of the loan. And the underlying policy of the bankruptcy process recognizes that these secured transactions play an important role in the national economy. Home lenders will refrain from offering mortgages to those with less than stellar credit unless they have the reassurance their losses will be limited in the event of default by the borrower. Federal bankruptcy laws, as they have been devised, take these considerations in to account by giving such preferential treatment to the claims of secured creditors.       

In Albuquerque, Giddens & Gatton Law, P.C. has bankruptcy attorneys who offer expert handling of Chapter 7, Chapter 11, Chapter 12 and Chapter 13 bankruptcy cases in New Mexico. The firm represents many Debtors and creditors in Albuquerque, Santa Fe, Taos, Raton, Farmington, Gallup, Grants, Roswell, Los Lunas, Placitas, Belen and the rest of New Mexico. Contact Giddens & Gatton Law, P.C. at (505) 633-6298 to set up an appointment with one of its New Mexico bankruptcy lawyers or visit the firm’s website at giddenslaw.com. Giddens & Gatton Law, P.C. is located at 10400 Academy Road N.E., Suite 350 in Albuquerque, New Mexico.