Unsecured creditor
Encyclopedia
An unsecured creditor is a creditor
other than a preferential creditor
that does not have the benefit of any security interest
s in the assets of the debtor
.
In the event of the bankruptcy
of the debtor, the unsecured creditors usually obtain a pari passu
distribution out of the assets of the insolvent company on a liquidation in accordance with the size of their debt after the secured creditor
s have enforced their security
and the preferential creditors have exhausted their claims.
Although in a liquidation the unsecured creditors will usually realize the smallest proportion of their claims, in some legal systems, unsecured creditors who are also indebted to the insolvent debtor can (and in some jurisdictions, must) set off
the debts, actually putting the unsecured creditor with a matured liability to the debtor in a pre-preferential position.
Creditor
A creditor is a party that has a claim to the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some property or service to the second party under the assumption that the second party will return an equivalent property or...
other than a preferential creditor
Preferential creditor
A preferential creditor is a creditor receiving a preferential right to payment upon the debtor's bankruptcy under applicable insolvency laws....
that does not have the benefit of any security interest
Security interest
A security interest is a property interest created by agreement or by operation of law over assets to secure the performance of an obligation, usually the payment of a debt. It gives the beneficiary of the security interest certain preferential rights in the disposition of secured assets...
s in the assets of the debtor
Debtor
A debtor is an entity that owes a debt to someone else. The entity may be an individual, a firm, a government, a company or other legal person. The counterparty is called a creditor...
.
In the event of the bankruptcy
Bankruptcy
Bankruptcy is a legal status of an insolvent person or an organisation, that is, one that cannot repay the debts owed to creditors. In most jurisdictions bankruptcy is imposed by a court order, often initiated by the debtor....
of the debtor, the unsecured creditors usually obtain a pari passu
Pari passu
Pari passu is a Latin phrase that literally means "with an equal step" or "on equal footing." It is sometimes translated as "ranking equally", "hand-in-hand," "with equal force," or "moving together," and by extension, "fairly," "without partiality."...
distribution out of the assets of the insolvent company on a liquidation in accordance with the size of their debt after the secured creditor
Secured creditor
A secured creditor is a creditor with the benefit of a security interest over some or all of the assets of the debtor.In the event of the bankruptcy of the debtor, the secured creditor can enforce security against the assets of the debtor and avoid competing for a distribution on liquidation with...
s have enforced their security
Security interest
A security interest is a property interest created by agreement or by operation of law over assets to secure the performance of an obligation, usually the payment of a debt. It gives the beneficiary of the security interest certain preferential rights in the disposition of secured assets...
and the preferential creditors have exhausted their claims.
Although in a liquidation the unsecured creditors will usually realize the smallest proportion of their claims, in some legal systems, unsecured creditors who are also indebted to the insolvent debtor can (and in some jurisdictions, must) set off
Set-off (law)
In law, a set-off is a statutory defense to the whole or to a portion of a plaintiff's claim. It had no existence under the English common law, being created by 2 Geo. II c. 22 for the relief of insolvent debtors, although set-off was recognized in equity...
the debts, actually putting the unsecured creditor with a matured liability to the debtor in a pre-preferential position.