What Is a Secured Claim in Bankruptcy?

Most bankruptcy filers owe a significant amount of debt to creditors when filing for bankruptcy. A "claim" is the outstanding debt balance that a particular creditor asserts its owed. The same holds true for a "secured claim" but there's a twist: A secured claim is a debt that's guaranteed by property (more below).

Here's how the claim process works in bankruptcy.

When money is available to pay toward debt, the court will send out a notice giving creditors a deadline—called a "claims bar" date—by which they must submit a "proof of claim" form. The information the claim holder will provide will include:

• a description of the type of debt (what the debt was for)
• the amount owed
• whether the debt is entitled to priority treatment (gets paid before other debt), and
• whether the claim is secured or unsecured.

A lender must check the "secured claim" box if the borrower agreed to guarantee the debt with property, called "collateral." In other words, the borrower put up an asset that the creditor could sell if the borrower defaulted on (broke the terms of) the contract.

Two common types of secured debt are mortgages and car loans. The lender retains an ownership interest (called a "lien") in the house or car (collateral) until the borrower pays off the loan. If the borrower fails to stay current, a lender can either foreclose on the home or repossess the vehicle.

By contrast, a creditor with an unsecured debt would not have the right to take property if the borrower failed to live up to the payment terms. Examples of unsecured debt include credit card balances, medical bills, and personal loans, such as payday loans.

Most creditors submit the forms promptly because failing to file a timely claim will result in a forfeiture of the creditor's right to receive a portion of the available funds.

(Learn more by reading Types of Creditor Claims in Bankruptcy: Secured, Unsecured & Priority.)