Section 506
Definition:
Section 506 of the U.S. Bankruptcy Code addresses the determination of secured and unsecured claims. It establishes that a creditor’s claim is considered secured only to the extent of the value of the collateral, with any excess amount classified as unsecured. This section ensures fair treatment of creditors and defines how much of a debt is protected by collateral in bankruptcy proceedings.
Section 506 Information
Under Section 506, a secured claim is limited to the value of the property securing the debt, while any portion exceeding that value becomes unsecured. This valuation affects how payments are made in Chapter 7, Chapter 11, or Chapter 13 cases. Section 506 also governs the treatment of undersecured claims, bifurcation of claims, and the rights of creditors regarding collateral. It plays a crucial role in cramdowns and reorganization plans by determining how much a secured creditor can claim from the estate.
Florida Legal Definition
In Florida, Section 506 applies through federal bankruptcy courts, with state property law influencing the valuation of collateral and perfection of liens. Florida courts recognize that the value of collateral is determined based on the replacement or fair market value at the time of the bankruptcy filing. Creditors and trustees rely on Section 506 to ensure that secured interests are appropriately addressed while protecting the rights of unsecured creditors under Florida law.
How It’s Used in Practice
Bankruptcy attorneys, trustees, and creditors use Section 506 to assess the extent of secured claims and plan distributions accordingly. For example, if a debtor’s property is worth less than the outstanding loan, the secured portion is limited to the property’s value, and the remainder is treated as unsecured. Section 506 also allows for cramdown plans in Chapter 11 or Chapter 13, enabling debtors to restructure secured debts fairly while satisfying statutory requirements.
Key Takeaways
- Section 506 determines the secured and unsecured portions of a creditor’s claim based on collateral value.
- Secured claims are limited to the value of the collateral; any excess is treated as unsecured.
- Florida property law influences collateral valuation and lien perfection in bankruptcy cases.
- Section 506 is essential for reorganization plans, cramdowns, and fair distribution of assets.
- Proper application ensures equitable treatment of secured and unsecured creditors.
Disclaimer: The information and opinions provided are for general educational, informational or entertainment purposes only and should not be construed as legal advice or a substitute for consultation with a qualified attorney. Any information that you read does not create an attorney–client relationship with Barnes Walker, Goethe, Perron, Shea & Johnson, PLLC, or any of its attorneys. Because laws, regulations, and court interpretations may change over time, the definitions and explanations provided here may not reflect the most current legal standards. The application of law varies depending on your particular facts and jurisdiction. For advice regarding your specific situation, please contact one of our Florida attorneys for personalized guidance.
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