Allowed secured claims

     A creditor with a lien may be oversecured or undersecured. In a bankruptcy case, if the lien cannot be avoided, a creditor whose claim is fully secured has an "allowed secured claim" in an amount equal to the amount of the debt. If the creditor with a lien is undersecured, the creditor has an allowed secured claim to the extent of the value of the collateral and an allowed unsecured claim for the balance (the deficiency, i.e., the difference between the amount of the debt and the value of the collateral). See Bankr. Code 506(a). In other words, an undersecured creditor is treated as having two claims each of which will be treated differently in the bankruptcy case.

     Consider the following examples:

     1. A debtor owes $500,000 to a lender secured by an unavoidable deed of trust on real property owned exclusively by the debtor. If the property is worth $750,000 and the lender's deed of trust has highest priority (i.e. it is a "first" deed of trust), the lender has an allowed secured claim in the amount of $500,000. If the property is worth $350,000, the lender has an allowed secured claim in the amount of $350,000 and an allowed unsecured claim in the amount of $150,000. If the property is worth $750,000, but the lender's deed of trust is subordinate to a deed of trust securing a debt of $300,000, the lender who is junior has an allowed secured claim in the amount of $450,000 and an allowed unsecured claim in the amount of $50,000.

     2. A debtor owes $10,000 to a lender secured by a security interest in the debtor's automobile. There are no other liens on the automobile. If the automobile is worth $12,000, the lender has an allowed secured claim in the amount of $10,000. If the automobile is worth $8,000, the lender has an allowed secured claim in the amount of $8,000 and an allowed unsecured claim in the amount of $2,000.

     The amount of an allowed secured claim obviously depends critically on the value of collateral. As we have noted elsewhere, value is elusive and imprecise. As a consequence, in a bankruptcy case, the parties in interest will frequently negotiate an agreed value. If they are unable or unwilling to do so, the bankruptcy court will determine value.

     Treatment of the allowed secured claim differs in some important particulars depending upon whether the case is a Chapter 7, Chapter 13, or Chapter 11.  See Commentary.Consumer Chapter 7, Commentary Chapter 13, and Commentary.Chapter 11.   But one common theme is clear: under any chapter of the Bankruptcy Code the allowed secured claim fares better than the allowed unsecured claim.  In the referenced commentaries, and in associated cases and problems, we provide a basic foundation for understanding the rights of the secured creditor in bankruptcy proceedings.  For more detailed treatment and for strategic planning for secured creditors, see L.LoPucki, Strategies for Creditors in Bankruptcy Proceedings (3rd Ed. Aspen Law & Business1999).