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Treatment of Secured Claims

Secured claims are claims secured with collateral, generally a lien on the debtor’s property.  A secured claim is only secured to the extent of lien that the creditor has on the debtor’s property.

Section 362(a) of the Bankruptcy Code prevents secured creditors from initiating foreclosure or repossession of the collateral property for satisfying their claims.  A debtor is provided relief by the “automatic stay” if the debtor does not have an equity in the collateral.  The equity of the debtor is measured by considering the value of the collateral compared to the amount of the secured claim.  The rule of “adequate protection” does not require the debtor to make interest payments to the secured creditors for the reason that the collateral property is retained by the debtor.  Adequate protection is required only if the value of the creditor’s interest in the collateral property is declinable.  Valuation of the collateral property is essential to determine the creditor’s extent of interest.

The law permits the trustee to sell the property of a debtor if it has equity in property subject to a creditor’s lien.  The trustee should attach the creditor’s lien to the proceeds.

Inside Treatment of Secured Claims