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How Does A Creditor Become A Secured Creditor?


Secured property gets special treatment in the law. Unlike with unsecured debts, with secured debts, the creditor can take back any property that secures the debt. Unsecured creditors, like medical debt, or credit card debt or pure monetary judgments, don’t get this kind of treatment.

Certainly, some debts in bankruptcy are legitimately secured. These are usually debts you hear about, and they are debts that often drive people to file for bankruptcy in the first place. For example, car loans are secured by your vehicle, which is why it can be repossessed if you don’t pay. Your home loan is secured by the home through a mortgage, which is why the bank can foreclose on your home.

Secured creditors in your bankruptcy can require that you either surrender the property and owe nothing, or else, that you keep the property and affirm the debt—that is, that the debt will survive the discharge. These are things that you as the debtor only would have to do, with secured creditors.

False Claims of Security

Sometimes, unsecured creditors want to be secured creditors. In your bankruptcy case, they will try to argue that they have a valid lien—a security—on your personal property. As such, they argue, they should get the special treatment that secured creditors get in bankruptcy, by having the right to take the supposedly-secured property to satisfy their debt.

But the Uniform Commercial Code (UCC) has requirements on how property is secured, and when a valid lien on property is created. This is called “perfecting” a security lien.

Perfecting Liens

To perfect a lien, the debtor must, at the time of purchase, or at the time of taking out a loan, provide a clear statement describing what exact property is being secured—that is, what property the lender can take back to repay the debt if you don’t pay.

Overbroad and general statements like “all personal property,” or “anything purchased with this loan,” are not specific enough to create a valid lien. Additionally, while descriptions and security agreements can be electronic, electronic agreements still must satisfy the detailed requirements that the UCC imposes on security agreements.

The agreement also must contain the names of both the creditors (the lender) and the debtor.

The creditor must then put a statement in the public records, demonstrating perfection of the lien.

Mistakes Creditors Make

Many creditors think that by flashing language on a keypad at a checkout register, that they have perfected their lien and become a secured creditor under the UCC. Or, they think that including a general, broad paragraph buried in a loan agreement, constitutes perfecting their lien. These are both false.

A good bankruptcy attorney can help you determine which creditor claims of security are legitimate, and which are claims that the creditor has no way of proving.

In some cases, when creditors threaten that they have security in your property when they really do not, the creditors can be sued for making false claims to collect a debt.

Contact the Boca Raton bankruptcy attorneys at the Law Offices of Stephen Orchard at 561-455-7961 for help handling all of your creditors when you file for bankruptcy.

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