Secured Debts: What Are They?

Whether a debt is secured or unsecured is one of the basic questions in bankruptcy law.

  • To determine whether an individual is eligible for Chapter 13, you have to know the total of the secured  debt.
  • To know what rights a creditor may have in the debtor’s property in any chapter, you have to know whether the creditor has a lien (that is, whether the creditor is secured).

So, what debts are secured by a lien?

Consensual liens

Some secured debts are familiar: home mortgages, home equity lines of credit and car loans.

These are all liens created by agreement between the debtor and the creditor and are embodied in some sort of written legal agreement.

Purchase money security interests

These security interest are lien rights that the seller retains in the goods purchased when the seller finances the purchase.

The lien can be created by a specific written agreement or may arise when the item is financed on the seller’s revolving credit plan or store credit card.

This kind of lien does not have to be perfected by the usual filing of a UCC financing statement.

In theory, if the buyer discharges his personal liability on the debt through bankruptcy, the seller retains the right to reclaim the goods.  The usual Sears, Good Guys, Circuit City and Zales credit plans give the seller a security interest in the goods purchased.

Contrast:  if you buy the same goods using a Visa or MasterCard (credit provided by a lender other than the seller), you get clear title to the goods.  Even if you discharge your liability on the credit card, the goods charged to the card are yours, free and clear of any security interest in favor of the seller or the credit card issuer.

Purchase money security interests can be avoided or stripped down to the present value of the collateral only in Chapter 11 and 13.   See The Power of 13.

It is our experience that creditors with purchase money security interests in consumer goods almost never file a law suit to enforce their interest in the goods. They are not really interested in the goods.   They rely on the debtor’s fear of repossession  to “encourage” debtors to pay for things with little present market value.

Blanket security interests

This is not a lien in blankets:  it refers to the term in most secured bank or SBA loans by which the borrower gives the lender a security interest in all the borrower’s personal property: the lien “blankets” all the borrower’s assets. (“Personal” here means everything but real estate, NOT “personal” as opposed to “business” assets.)

Even intangibles like accounts receivable and intellectual property may be subject to a blanket security interest.  The agreement may also give the creditor a lien in assets acquired after the security agreement is signed.

Since the borrower agreed to give the lender a security interest in the property described in the security agreement, the lien cannot be avoided on the grounds it impairs an exemption (the lien is not a “judicial lien”).

In Chapter 11 or Chapter 13, the lien may be stripped down to the value of the property at the time the bankruptcy is filed.

Since the lender has rights in the items themselves and in any proceeds from their sale, the borrower may not be free to sell the asset and pocket the proceeds or even spend the proceeds paying other business debts.

Spending the sales proceeds without the lender’s permission may be a form of fraud creating a debt which is not dischargeable under 11 U.S. C.  523.

Involuntary liens

Judicial liens

Judgment liens are created by law, in favor of the winning party in a lawsuit.

Usually a judgment does not, in and of itself, give the judgment creditor a lien.  The creditor must usually take an addition step of filing or recording the judgment with the designated agency to create a lien on the judgment debtor’s property.

In California, recording an abstract of judgment with the County Recorder gives the judgment creditor a lien on all the debtor’s real estate in the county.

Recording notice of the judgment with the Secretary of State gives the judgment creditor a lien on all the debtor’s personal property.

Check the laws of your state to determine how judgment liens are perfected.  Get a report of liens on file with the secretary of state to know what liens are perfected, and the seniority of each lien.

In analyzing a debtor’s situation for bankruptcy planning, it is important to know if judgment liens have been perfected, since secured debts are totaled separately from unsecured debts in calculating the debtor’s eligibility for Chapter 13.

Judgment liens may be avoided if they impair exemptions;  in Chapter 13 they can be stripped down to the value of the assets to which the lien attaches.  More on avoiding liens and Chapter 13.

Tax liens

The recordation of a tax lien perfects a lien on all of the taxpayer’s property, real and personal.  It may attach even to retirement savings and 401(k) plans that are beyond the reach of other creditors.

It is a statutory lien, so cannot be avoided in bankruptcy like judicial liens that  impair an exemption.

Tax liens can be stripped off in Chapter 13 if there is no equity in the property for the lien to attach to.


About the Author
Northern California bankruptcy lawyer Cathy is a 30+ year veteran of bankruptcy practice in the Silicon Valley. She is known for energetic representation of clients and her command of bankruptcy law.