There are several different types of creditors a bankrupt debtor may have obligations to. One of these types is the secured creditor. In this article, we define the term “secured creditor” and explain their rights in bankruptcy. 

Key Takeaways

• A secured creditor is a creditor whose loan is backed by collateral
• If a borrower defaults on their loan, a secured creditor can seize and sell the collateral
• Financial institutions offering mortgages and car loans are two examples of secured creditors
• Secured creditors have special rights in bankruptcy, including the right to be paid before any other creditor out of the proceeds of their collateral
• While bankruptcy can discharge a secured debt, it does not erase the lien 

What Is a Secured Creditor?

A secured creditor is a creditor whose loan is backed by collateral. The collateral is considered to “secure” the loan. If the borrower does not pay the loan, the secured creditor will be able to seize the collateral and sell it in order to offset the loss. 

Examples of Secured Creditors

Secured creditors are often financial institutions such as banks. Two of the most common examples of secured loans are mortgages and auto loans. In these situations, the house and/or the car are collateral securing the loan. If a borrower stops paying their mortgage payments, the secured creditor can seize their home. They will then most likely sell the home in an auction to recoup some of the money they lost when the borrower defaulted on the loan. 

Secured Creditors in Bankruptcy

When a debtor files for bankruptcy, they must turn over their property to a bankruptcy estate. The assets in the estate will then be liquidated to pay back the debtor’s creditors.

Secured creditors have special rights in bankruptcy. These include the following.

• The right to be paid before any other creditors out of the proceed of their collateral
• The right to receive post-petition interest, fees, costs, and charges
• The right to receive adequate protection for any decrease in the value of their interest in the collateral resulting from any use, sale, lease, or grant of a lien
• The right to credit bid their claims in a section 363 sale of their collateral

While the bankruptcy process does create an automatic stay which stops stop creditors from being able to make efforts to collect their debts and discharges eligible debts, it does not void a lien. This means that secured creditors cannot pursue payment for their loan, but they can still seize the property and sell it. Alternatively, if for whatever reason the property is unavailable, the secured creditor can sue the debtor for the value of the collateral.