Secured Lien in Bankruptcy Only Secured To The Extent That there Is Value In the Asset

Written by Adam Peck Category: Nursing Homes January 23rd, 2013 2 min read

If a debtor in bankruptcy owes a debt, and the debt is secured by some kind of lien (like a mortgage), the claim is “secured.” The claim is secured, though, only to the extent that there is value in the secured asset above and beyond what’s already pledged to others says California Bankruptcy Attorney Steven C. Peck.

Let’s try an example from divorce. Let’s say that Iggy and Edith divorce, and Iggy agrees to pay Edith $80,000 two years after their divorce is effective. Iggy keeps the house. To secure the payment, Edith takes a second mortgage in the house, which is junior in priority to the first mortgage. The two years have now passed, the house is now worth $200,000, and the mortgage has a current balance of $160,000. Does Edith have a secured claim? If so, how large? Here’s where bankruptcy code section §506(a) steps in.

Edith has a secured claim in the amount of the excess of the value of the house over the value of the existing mortgage, or $40,000. Edith still has the $40,000 remainder of her claim, but it’s an unsecured claim.

Secured creditors holding a judicial lien (that is, a lien created by a judge rather than by agreement) can have their security interests devalued dramatically if the property secured (for example, a homestead) is the subject of an exemption. Congress has said (in 11 U.S.C. §522(f)(1)(A)) that the exemption must yield to a judicial lien to secure support obligations. A judicial lien to secure a claim in property division, though, could be reduced to allow the exemption to be effective.

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Written by Adam Peck

Expertise: Personal Injury

Adam J. Peck, ESQ is a principal with Peck Law Group, APC. In 2008, Mr. Adam Peck received his Juris Doctorate from Whittier Law School where he graduated Cum Laude. His practice is primarily dedicated to representing Elders, Dependent Adults, along with their loved ones and family members, who have suffered horrific personal injuries.