Legal Definitions - secured claim

A secured claim refers to a debt or obligation where the creditor (the party owed money) has a legal right to specific property, known as collateral, belonging to the debtor (the party who owes money). This collateral serves as a guarantee for repayment. If the debtor fails to fulfill their obligation, the creditor can take possession of or sell the collateral to satisfy the debt, giving them a stronger position than an unsecured creditor who has no such specific property to claim.

Here are some examples illustrating a secured claim:

• Home Mortgage: When an individual purchases a house using a mortgage, the bank or lender has a secured claim against the property itself. The house serves as collateral for the loan. If the homeowner stops making mortgage payments, the bank can initiate foreclosure proceedings, take possession of the house, and sell it to recover the outstanding loan amount. This demonstrates how the specific property (the house) secures the bank's claim.

• Business Equipment Loan: A small manufacturing company takes out a loan from a bank to purchase new, specialized machinery. As part of the loan agreement, the bank requires the machinery itself to be pledged as collateral. This creates a secured claim for the bank against that specific equipment. Should the company face financial difficulties and default on the loan, the bank has the legal right to seize and sell the machinery to recoup its losses, highlighting the direct link between the debt and the specific asset.

• Vehicle Financing: When someone finances the purchase of a new car through a dealership or a bank, the lender typically holds a secured claim on the vehicle. The car itself acts as collateral for the loan. If the borrower fails to make the agreed-upon monthly payments, the lender has the right to repossess the car. This illustrates a secured claim where a movable asset guarantees the repayment of a debt.