Garuda Excavations purchases a five- ton excavator from Tonka Inc for $350 000 with the help of a secured loan for that amount from Bank X. The loan covers the full amount of the purchase and is secured against the machinery. Garuda uses the excavator for two years, but notwithstanding Garuda's valiant efforts, the company is constantly in the red and is eventually petitioned into bankruptcy by its creditors. Upon learning of the petition, Bank X moves swiftly to realize on its security. It takes immediate possession of the excavator, which it sells for $300 000. It will have an unsecured claim against Garuda's estate in bankruptcy for $50 000.

Question

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When Bank X sells the excavator for $300,000, it recovers part of the secured loan. The remaining $50,000 becomes an unsecured claim against Garuda's estate in bankruptcy, as the security (excavator) no longer covers the full loan amount.

Garuda Excavations Purchases a Five- Ton Excavator from Tonka Inc