|
|
|
|
Payment to Secured Creditors in BankruptcyLet's try an example from divorce. Let's say that Henry and June divorce, and Henry agrees to pay June $80,000 two years after their divorce is effective. Henry keeps the house. To secure the payment, June 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 June have a secured claim? If so, how large? Here's where bankruptcy code section §506(a) steps in. June 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. June 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. |
|
|
