A creditor in bankruptcy is known as a Secured Creditor if it has:
- Delinquent (late or overdue) debt AND
- Written promise to repay the debt AND
- Written agreement – a mortgage (real property) or a financing or security agreement (personal property) AND
- Written agreement is in default – debtor has violated terns of the written agreement, usually dealing with the length of time the debt has been overdue and in violation of any grace periods.
A secured bankruptcy creditor is a party who has a perfected security interest in your property. This is a party to whom you owe money and who has perfected, or made valid, a lien against your property. Under non-bankruptcy law, a perfected lien is the legal right to sell your property if you do not pay the debt. Recording it with a government agency such as a county Office of Judicial support or Prothonotary, a counter Recorder of Deeds, the Pennsylvania Department of Transportation (PennDOT), or the Pennsylvania Department of State perfects the lien. Once that happens, the lien holder is said to have a perfected security interest in the property. Non-bankruptcy state law creates security interests and liens.
A secured creditor holding a consensual lien in bankruptcy owns a loan evidenced by a written agreement to repay the debt, and a document pledging property to secure the repayment of that debt. The lien created in this way is consensual because you have consented to it by signing the loan agreement and the document pledging the property.
Mortgage
When the written agreement to repay the debt concerns a loan to purchase real property, the agreement is called a note. The written document pledging property to secure the repayment of the note is called a mortgage. A mortgage of real property transfers to the secured party a property ownership interest in the property described in the mortgage. The mortgage gives the secured party a perfected lien against real property when the creditor records the mortgage in your county Recorder of Deeds Office.
In the case of real property, the lien given by any of these agreements gives the lien holder or owner of the security interest the right to file a foreclosure action in state court and sell the mortgaged real property if the loan is not repaid according to the terms of the note. This usually means when the payments have been late for at least three months.
Financing Agreement
When the written agreement to repay the debt concerns personal property, the agreement can be called several things, including a “loan agreement”. The written document pledging property to secure the repayment of the loan agreement is called security agreement or financing agreement.
Common examples are car, truck, motorcycle, boat, airplane and RV loans secured by personal property for which the state issues a paper Certificate of Title, or simply, Title. The financing agreement grants to the lender a security interest, in the secured personal property. The lien is recorded with the Pennsylvania Department of Transportation PennDOT), which stamps it on the title you get when you buy a new vehicle.
When the secured property is personal property other than a motor vehicle, such as kitchen equipment, machinery, or a piano, the written agreement to repay the debt can also be called several things, including a “loan agreement”. The written document pledging property to secure the repayment of the loan agreement is called a financing statement, which creates a lien against the property when it is recorded with then Pennsylvania Department of State.
In the case of personal property, the lien gives the lien holder the right to repossess the personal property if the loan is not repaid according to the terms of the loan agreement. This usually means when the payments have been late for at least three months. The lien holder has the right to do this without going to court. After the repossession, the lien holder sells the property to recover the outstanding debt. Any extra money is to be returned to you. There is usually no money left over.
While your debts to a consensual secured creditor are dischargeable in bankruptcy, that is, you are relived of your responsibility to repay them, consensual liens survive bankruptcy, so if you want to keep the secured property, you must pay the entire balance of the debt.
Statutory Liens
Federal and State Tax Liens
The IRS and Commonwealth of Pennsylvania have secured liens in property when they recorded tax liens against you for unpaid taxes in any county where you own real estate. This tax lien acts as a lien against all real estate you own in that county. If the IRS or the Commonwealth has not recorded the lien, they have the status of an Unsecured Creditor Holding Priority Claims and liens. In either event, their liens have priority over, or are paid before other creditors, even other secured creditors. Whether they hold secured liens or priority liens, both the IRS and Pennsylvania Department of Revenue also have the power to have your real or personal property sold by filing legal papers in the county where you own any real or personal property or where you live. They also both have the power through other legal proceedings to garnish your wages, bank accounts, or people who owe you money, up to certain limits.
County Tax Claim
Local Tax Claim Bureaus record real estate tax liens in records they maintain in their offices. They then have the power to have the Sheriff sell only real estate on which you owe back property taxes at a tax-upset sale to the highest bidder. The successful bidder now owns your real estate subject to all liens created or filed before the tax lien. If you still owe real estate taxes after the sale, the Tax Claim Bureau can sue you personally, and if successful, to become judgment lien creditors. If the Tax Claim Bureau has not recorded a lien before your bankruptcy filing, it becomes an unsecured creditor holding a priority claim. In either event, its lien has priority over, other creditors, even other secured creditors.
Judgment Lien Creditors
These creditors have sued you in any court in the world and won a judgment requiring you to pay money. They can be individuals, companies, charities, or any other entity allowed to sue in the court where you were sued. When this judgment is properly recorded with the in the courthouse of any U.S county where you own real estate, it creates a lien against all real estate you own in that county. If the judgment lien is not properly recorded, the creditor is unsecured, not secured. Also, unlike the contractual or consensual or tax liens described above, these liens can be avoided in bankruptcy if they impair your use of an exemption in an item of property by means of a legal proceeding before the Bankruptcy Judge.
This is important in bankruptcy because while the debt secured by a recorded lien is discharged, which means you do not have to pay it back, the lien is not discharged, and is said to survive bankruptcy. So, in a Chapter 7, you must pay the outstanding balance on secured debt to keep the property, and secured creditors are paid first from any non-exempt property. Most individual filers do not have non-exempt property. See What are Exemptions and How Do They Help You to Keep Your Property? In a Chapter 13, you pay back the arrearages on your recorded liens over the period of you Reorganization Plan, which cannot exceed five years.
A creditor in bankruptcy is known as a Secured Creditor if it has:
- Delinquent (late or overdue) debt AND
- Written promise to repay the debt AND
- Written agreement – a mortgage (real property) or a financing or security agreement (personal property) AND
- Written agreement is in default – debtor has violated terns of the written agreement, usually dealing with the length of time the debt has been overdue and in violation of any grace periods.
Mortgage of Real Property
If the written agreement describes a piece of real property, the agreement is called a mortgage. A mortgage of real property transfers to the secured party (the lender) an ownership interest in the legally-described real property. Secured property is the property named or described in the mortgage which meets certain strict requirements of non-bankruptcy Pennsylvania state law. In legal terms, the mortgage conveys to the secured party an “estate”. This mortgage gives to the secured party, known as a “creditor”, a lien against real property, which the creditor records in your county Recorder of Deeds Office. The lien gives the secured party the right to sell the secured property if the debt is not repaid as agreed
Secured creditors of real property include
- Banks
- Mortgage Companies
- Credit Unions
- Home Equity Loan Companies
- Issuers of Lines of Credit
Financing Agreement for Personal Property
If the written agreement describes an item of personal property, the agreement is called “security” or “financing” agreement. Common examples are car, motorcycle, boat, and RV loans. The financing agreement grants a “security interest”, a property ownership interest in the legally-described personal property, the title to which has the lien stamped on it.
Secured Creditors of Personal Property
- Banks and other lending institutions
- Car, truck, motorcycle, and RV dealers
Any lien is not legally enforceable against real or personal secured property and no property can be sold under Pennsylvania law unless the written mortgage or security agreement:
- Has been Signed by you AND
- Names specific secured property or classes of secured property AND
- Recorded (filed with your county Recorder of Deeds for real property or a specific state agency specified by Pennsylvania law based upon what type of personal property is secured)
- Before the creditor attempts to take the secured property.
If the loan is not delinquent and in default under the mortgage or security agreement, the lender is not a creditor in your bankruptcy case.
If the bankruptcy trustee discharges the monetary debt represented by the mortgage note or loan agreement, the debt is wiped out in bankruptcy. However, the lien on the real or personal property itself generally is not “avoided” (wiped out). The debtor must pay the outstanding balance on secured debt to keep the property. Secured creditors are paid first from any non-exempt property. Most individual filers do not have non-exempt property. See the What are Exemptions and How do They Help You to Keep Your Property? Page for more information.