Unsecured Creditor
What does "Unsecured Creditor" mean in law?
An unsecured creditor holds a claim against the debtor that is not backed by any lien, security interest, or collateral, placing it at the bottom of the distribution hierarchy in bankruptcy after secured claims and priority claims. Unsecured creditors include trade vendors, credit card companies, medical providers, and holders of deficiency claims remaining after collateral has been applied. In Chapter 7, unsecured creditors receive a pro rata distribution from whatever assets remain after satisfying secured and priority claims, which often results in little or no recovery. In Chapter 11 and Chapter 13, unsecured creditors must receive at least as much as they would in a hypothetical Chapter 7 liquidation under the "best interests of creditors" test of section 1129(a)(7).
Definition
An unsecured creditor holds a claim against the debtor that is not backed by any lien, security interest, or collateral, placing it at the bottom of the distribution hierarchy in bankruptcy after secured claims and priority claims. Unsecured creditors include trade vendors, credit card companies, medical providers, and holders of deficiency claims remaining after collateral has been applied. In Chapter 7, unsecured creditors receive a pro rata distribution from whatever assets remain after satisfying secured and priority claims, which often results in little or no recovery. In Chapter 11 and Chapter 13, unsecured creditors must receive at least as much as they would in a hypothetical Chapter 7 liquidation under the "best interests of creditors" test of section 1129(a)(7).
Example
The credit card company that was owed $30,000 by the debtor filed as an unsecured creditor and ultimately received only a 5% distribution because the estate's assets were largely consumed by secured claims and administrative expenses.