Definition
An unsecured creditor is a person or entity to whom a debtor owes money, but who does not have a lien or claim on specific assets if the debtor defaults or declares bankruptcy. Unlike secured creditors, unsecured creditors do not have a preferential right to specific property or collateral; instead, they must compete with other unsecured creditors for any remaining assets after secured creditors are paid.
Examples
- Credit Card Companies: Individuals or businesses holding credit card debt wherein the credit card issuer has no specific asset securing the debt.
- Medical Providers: Hospitals and healthcare professionals who deliver services and later bill the patient.
- Utility Companies: Providers of services such as electricity, water, and internet often hold unsecured claims if payments are defaulted upon.
- Suppliers: Companies providing goods or services on credit terms without requiring collateral.
Frequently Asked Questions (FAQs)
What happens to unsecured creditors in bankruptcy?
Unsecured creditors are paid last from the debtor’s remaining assets after secured creditors and priority claims have been paid.
How do unsecured creditors attempt to get paid back?
Unsecured creditors may take legal action, negotiate payment plans, or file a claim in bankruptcy court but ultimately have limited recourse compared to secured creditors.
Are unsecured creditors ever prioritized?
Certain unsecured creditors may receive priority under bankruptcy law, such as employees owed wages or the government for taxes.
Can an unsecured creditor become a secured creditor?
Possible if the debtor pledges collateral for an existing unsecured debt, converting it to a secured obligation.
Related Terms with Definitions
Secured Creditor: A creditor with the legal right to take possession of specific assets if the debtor defaults, providing them a higher priority in bankruptcy proceedings.
Priority Claim: A claim that is prioritized above other unsecured claims, typically for certain categories like employee wages or tax obligations.
Debtor: An individual or entity that owes a debt to another party.
Collateral: An asset pledged by a borrower to secure a loan or credit, reducing risks for the lender.
References for Online Resources
- Investopedia: Unsecured Creditor Definition
- U.S. Bankruptcy Court: Unsecured Claims
- Nolo: Unsecured Debt
Suggested Books for Further Studies
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“Principles of Corporate Finance” by Richard A. Brealey, Stewart C. Myers, and Franklin Allen
- A comprehensive guide to the concepts of corporate finance involving creditors and financial strategies.
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“Corporate Finance” by Jonathan Berk and Peter DeMarzo
- An in-depth exploration of the theories and strategies in corporate finance, covering topics on creditors.
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“Bankruptcy and Insolvency Accounting, Practice and Procedure” by Grant W. Newton
- Detailed examination of accounting practices and procedures during bankruptcies, beneficial for understanding the position of unsecured creditors.
Accounting Basics: “Unsecured Creditor” Fundamentals Quiz
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