Unsecured Creditor Definition
An unsecured credit is a credit issued to a borrower without any form of collateral such as assets or properties. Generally, unsecured credits have higher risks because repayment of such debt might be difficult when the borrower defaults. An unsecured creditor refers to a lender which might be an individual lender or financial institution that issues a credit to a borrower without obtaining any specific collateral. Example of an unsecured creditor is a debenture holder.
Since an unsecured credit is not backed by any collateral, if the borrower defaults, the lender or institution has no claims on any assets or properties belonging to the borrower.
A Little More on What is an Unsecured Creditor
In a typical loan or credit, an individual receives a loan using his asset or property as collateral. This means if such borrower defaults, the asset or property held by the lender can be sold in a foreclosure or short sale to pay back the loan.
Usually, when individuals borrow money from a creditor or lender without any collateral, such credit is given based on trust that the borrower will pay back. Lenders rarely issue credits without collateral, unsecured debts are not common. In some cases however, large corporations engage in unsecured credits.
Differences Between Secured and Unsecured Creditors
The same way a secured credit is different from an unsecured credit so also are secured creditors different from unsecured creditors. A secured creditor is an individual or institution that issues loans to borrowers using a collateral, while an unsecured creditor takes no collateral when issuing loan to borrowers.
Secured creditors offer lower interest rates to borrowers since collateral is involved unlike unsecured creditors that have high interest rates.
When a borrower defaults, a secured creditor has right or claims on the assets or properties held as collateral for the loan. For unsecured creditors on the other hand, litigation and bankruptcy proceedings are required when borrowers default.
Here are some important things you should know about unsecured creditors;
- An unsecured creditor is an individual or institution that extends loans to borrowers without any asset or property held as collateral.
- A secured creditor is a creditor that offers loans backed by collateral as against an unsecured creditor.
- Unsecured charge higher interest rates because unsecured loans have higher risks than the secured debts.
- Bankruptcy proceedings and litigation are the option options for unsecured creditors when borrowers default on loan repayment.
Types of Unsecured Creditors
The common types of unsecured creditors are highlighted below;
- Credit card companies
- Student loans firms
- Personal loan firms
- Hospitals and doctor’s office
Despite that unsecured debts have no collateral, when borrowers default, it negatively affects their creditworthiness. Unsecured loans also have higher interest rates due to the higher risks involved.
References for “Unsecured Creditor”
Academic research for “Unsecured Creditor”
The Unsecured Creditor–The Little Businessman–And the Uniform Commercial Code, Schnader, W. A. (1959). The Unsecured Creditor–The Little Businessman–And the Uniform Commercial Code. BC Indus. & Com. L. Rev., 1, 65.
The Status of the Unsecured Creditor in the Modern Law of Secured Transactions, Raphael, J. S. (1960). The Status of the Unsecured Creditor in the Modern Law of Secured Transactions. BC Indus. & Com. L. Rev., 2, 303.
The decline of unsecured creditor and shareholder recoveries in large public company bankruptcies, Wood, A. A. (2011). The decline of unsecured creditor and shareholder recoveries in large public company bankruptcies. Am. Bankr. LJ, 85, 429.
The Plight of the General Unsecured Creditor Under the Uniform Commercial Code and Suggested Remedies, Levy, H. R. (1968). The Plight of the General Unsecured Creditor Under the Uniform Commercial Code and Suggested Remedies. Com. LJ, 73, 73.
The Status Of The Unsecured Creditor In The Modern Law Of Secured Transactions, Raphael, J. S. (1963). The Status Of The Unsecured Creditor In The Modern Law Of Secured Transactions. Am. Bus. LJ, 1, 26.
Unsecured Creditor versus Unregistered Charge, Lee, E. B. (1998). Unsecured Creditor versus Unregistered Charge. SAcLJ, 10, 241.
When an Unsecured Creditor Is a Secured Creditor, Cuming, R. C. (2003). When an Unsecured Creditor Is a Secured Creditor. Sask. L. Rev., 66, 255.
Imagine a Secured Creditor Being Beaten by an Unsecured One!, Bernhardt, R. (2012). Imagine a Secured Creditor Being Beaten by an Unsecured One!. Available at SSRN 2126765.
Some Considerations regarding the Recovery of a Debt by the unsecured Creditor of an Heir, Şchiopu, S. D. (2016). Some Considerations regarding the Recovery of a Debt by the unsecured Creditor of an Heir. Bulletin of the Transilvania University of Braşov, Series VII: Social Sciences and Law, 9(2), 183-188.
Zero Times Something Is Still Zero: Adapting Till to Unsecured Creditor Claims, Gaudet, R. B., & Bury Jr, D. L. (2016). Zero Times Something Is Still Zero: Adapting Till to Unsecured Creditor Claims. American Bankruptcy Institute Journal, 35(1), 36.