We last considered the questions that each individual must reflect on before they file bankruptcy. In addition to these pre-bankruptcy considerations, debtors should also understand a few definitions for some of the common bankruptcy terms. Here are a few of these bankruptcy definitions:
Equity - the value of collateral in excess of the combined secured obligations’s of the liens in that collateral.
Collateral - property that is subject to a lien.
Lien - a creditor’s interest in a debtor’s property that secures repayment of a secured obligation.
Voluntary lien - lien created with the debtor’s consent.
Involuntary lien - a lien created without the debtor’s consent, such as a judicial lien created by a court proceeding.
Secured creditor - a creditor with a lien creating a property interest in a debtor’s asset that secures repayment of the creditors secured obligation.
Unsecured or general creditor - a creditor who does not have a lien creating a property interest in a debtor’s assets. This includes creditors that have recovered a judgment against a debtor, but who haven’t taken the additional steps necessary to create a judicial lien. This is generally the lowest ranking creditor in terms of legal rights.
Undersecured creditor - a creditor with a lien in property that is worth less than the amount of the secured obligation or has an unsecured deficiency claim. The udersecured creditor is an unsecured creditor to the extent the secured obligation is greater than the value of the property which the creditor has a lien over. Most creditors fall into this category.
Oversecured creditor - a creditor with a lien in property that is worth more than the amount of the secured obligation. This creditor has an equity cushion to protect it from becoming undersecured.
These bankruptcy definitions provide the foundation for bankruptcy law. With these bankruptcy definitions in mind, let’s take a look at how unpaid debts are collected.
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