Secured vs. Unsecured Claims
The distinction between secured and unsecured loans comes down to the degree of recourse that the creditor has if the debtor fails to make payments in accordance with the terms of the loan agreement. Secured loans are backed by collateral, which the lender has the right to seize in the event of non-payment, and they are also in a stronger position than unsecured creditors when it comes to receiving the borrower’s assets. Secured creditors need legal advice from a creditor’s rights attorney when they are experiencing issues relating to non-payment.
Secured Claims Are Backed By Collateral and Have Higher Repayment Rights
Secured loans are backed by tangible property, often what the borrower has purchased with the proceeds of the loan. For example, a mortgage is a form of secured credit because the lender has the right to foreclose upon the property if the borrower does not repay the loan. In other cases, loans for the purchase of heavy equipment often use that equipment as collateral to secure the loan. In a consumer setting, auto loans are considered secured because of the lender’s right to repossess the vehicle. A secured collateral may sell the collateral and use the proceeds against the money they are owed, filing a claim in bankruptcy for any balance that is not covered.
In bankruptcy, secured creditors’ right of repayment comes before that of other creditors. They have a relatively high degree of protection among lenders because they would likely get something back in insolvency. The value of the property is often worth more than the amount of money that they are owed. They would have to return the excess money to the bankruptcy estate for distribution to other creditors. The higher level of protection afforded to secured creditors means that the interest rates they are charged are generally lower than that of secured lenders, who do not have the same degree of protection.
Unsecured Creditors Cannot Take Collateral and Do Not Have the Same Priority
Unsecured loans do not give the lender the right to seize any collateral backed by the loan because there is none. Credit card debt is the most common type of unsecured loan (although there are forms of secured credit cards for borrowers who otherwise have trouble getting credit). The credit card company merely has the right to demand payment and sue when the borrower defaults on the loan. They do not get the right to take back the property that the borrower bought with the loan.
In bankruptcy, unsecured creditors come after secured creditors but before shareholders (who often get completely wiped out in a corporate bankruptcy). An unsecured creditor would still be represented on a committee, and they would have rights in bankruptcy, although they are only paid after secured creditors. There may also be other categories of priority unsecured creditors who would be paid before general unsecured creditors. These lenders often need to fight for their own legal interests and jockey against other unsecured creditors. Debtors may seek permission from the court to repay some unsecured claims before others, so it is essential, as a creditor, to be prepared for the bankruptcy process.
Contact a South Carolina Creditors’ Rights Lawyer Today
As a creditor, it is essential that you know your rights and how you may be able to collect repayment of what you are owed, whether it is by taking the collateral or through the bankruptcy process. The creditors’ rights attorneys at Crawford & von Keller can guide you through the process of collection, repayment and bankruptcy. Call us today at 803-790-2626, or visit us online, to speak with one of our attorneys.
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