A secured transaction is a loan or a credit transaction in which the lender acquires a security interest in collateral owned by the borrower and is entitled to foreclose on or repossess the collateral in the event of the borrower's default.
[3] In the event of a bankruptcy proceeding, a secured creditor needs to file a proof of claim describing the debt and the remaining balance owed.
Claims also can be oversecured, where the value of the collateral is worth more than the amount due for the lien.
One feature that applies in bankruptcy proceedings that impacts creditors is the automatic stay.
The term includes: (A) proceeds to which a security interest attaches; (B) accounts, chattel paper, payment intangibles, and promissory notes that have been sold; and
[9] Depending on the type of collateral special rules may apply to the secured transaction.
An unsecured creditor is simply a person who is owed money and has not received payment according to the terms of the agreed upon transaction.
In other words, the unsecured creditor is at the back of the line of priority – his only remedy is to obtain a judgment from the court for the amount of the defaulted loan.
In this case, the debtor would receive the excess $5K (surplus) which he would use to satisfy the debts of his unsecured creditors (and then would have $3K left over).
It is crucial, if you are a lender, to have a security agreement in collateral that you are confident is worth at least as much as the amount of the loan you made to the debtor.