If a debtor in bankruptcy owes a debt, and the debt is secured by some kind of lien (like a mortgage), the claim is "secured." The claim is secured, though, only to the extent that there is value in the secured asset above and beyond what's already pledged to others says California Bankruptcy Attorney Steven C. Peck.
Let's try an example from divorce. Let's say that Iggy and Edith divorce, and Iggy agrees to pay Edith $80,000 two years after their divorce is effective. Iggy keeps the house. To secure the payment, Edith takes a second mortgage in the house, which is junior in priority to the first mortgage. The two years have now passed, the house is now worth $200,000, and the mortgage has a current balance of $160,000. Does Edith have a secured claim? If so, how large? Here's where bankruptcy code section §506(a) steps in.
Edith has a secured claim in the amount of the excess of the value of the house over the value of the existing mortgage, or $40,000. Edith still has the $40,000 remainder of her claim, but it's an unsecured claim.
Secured creditors holding a judicial lien (that is, a lien created by a judge rather than by agreement) can have their security interests devalued dramatically if the property secured (for example, a homestead) is the subject of an exemption. Congress has said (in 11 U.S.C. §522(f)(1)(A)) that the exemption must yield to a judicial lien to secure support obligations. A judicial lien to secure a claim in property division, though, could be reduced to allow the exemption to be effective.
Contact Steven Peck's Premier Legal toll free at 1.866.999.9085 to talk to an experienced Los Angeles Bankruptcy Attorney and visit us on-line at www.premierlegal.org.
