The Rights of a Secured Creditor in Bankruptcy

A secured creditor is a creditor with a security interest in a debtor's asset(s). In a bankruptcy, a secured creditor stands before an unsecured creditor in priority and can enforce their security interest. A secured creditor is entitled to certain rights, including a share in the bankruptcy property and a chance to challenge a debtor's plan or right to discharge.

Secured Creditors Rights

Among the rights that secured creditors are entitled to are the following:

1. A share in any distribution arising from the sale of the bankruptcy estate (usually in chapter 7). They stand in line according to priority of their claim. A secured creditor has more of a chance to recover than an unsecured creditor, who may end up with nothing.
2. A chance to attend a creditors meeting and be heard by the bankruptcy court regarding the debtor's submitted plan under chapters 11, 12, and 13, the liquidation of non-exempt assets under chapter 7 as well as the distribution of payments from the estate assets.
3. An opportunity to challenge the debtor's discharge of that particular creditor's debt.

What Creditors Should Do

Under bankruptcy law, a creditor must cease all collection action (including billing, phone calls and lawsuits) after notice of a bankruptcy action. In addition, the creditor should do the following:

• File a claim with the bankruptcy court as soon as they are notified. This should be done promptly as to avoid missing any deadline.
• Submit copies of contracts or other judgments regarding their claim or summarize the claim in the case where it is not practical to submit a huge number of documents.
• Determine whether their claim is secured with a lien on the debtor's assets. This is usually the case where a particular asset has served as collateral for the original loan. A lien can be created by a deed of trust on real property, through a security agreement on a debtor's personal property, or through a judgment.
• Determine if their claim is dischargeable. Under chapter 7, certain assets are non-dischargeable, such as those that arise from divorce, taxes, or debts from the debtor's willful and malicious acts. A list of non-dischargeable debts can be found at 11 U.S.C. 523.
• Consider filing an adversary proceeding to preserve their claim after bankruptcy.
• Request a relief from a bankruptcy's automatic stay by showing that the equity in their security may decline during the automatic stay. As an alternative, they may request protection payments adequate enough to prevent the equity's decline.
• Report any debtor fraud to the court-appointed trustee. Fraud includes concealment or transfer of assets that should be included in the bankruptcy estate. The trustee can investigate and recover any money due for the estate. In case of debtor fraud, the creditor can challenge the debtor's right to a discharge. 
• Closely monitor the case. If it is dismissed due to compliance failure by the debtor, the creditor may then proceed to collect the owed debt.

Talk with an Attorney

If you are a secured creditor in a bankruptcy case, you retain certain rights regarding the debtor's assets. You also have a right to challenge a debtor's submitted payment plan or right to discharge. Talk with an experienced bankruptcy attorney to discuss your case.