“[A] claim or debt for which a creditor holds no special assurance of payment, such as a mortgage or lien” or “a debt for which credit was extended based solely upon the creditor’s assessment of the debtor’s future ability to pay” (United States Courts). “A debt that doesn’t give the creditor the right to take a particular item of property if the debtor doesn’t pay. Examples include credit card debts and medical bills” (Nolo’s Law).
Example Sentence
While a secured claim is attached to some collateral (a car, business, etc.), an unsecured claim is not backed by material guarantees.
Case Study
Phillip lent a sum of money to his friend Brian to start up a business when his own business was thriving. When Phillip had to file for bankruptcy, he found it necessary to call in his loans. Brian, who had a lien on his airplane, paid off Phillip quickly to retrieve his car. However, Phillips’s claim on Brian was unsecured: His only security that Brian would pay him back had been the hope that he would be able to; and the full value of Donald’s assets was less than what he owed. Since Donald’s business went under, Scrooge had no guarantee of seeing the loan repaid in the near future.
Other Important Information
The repayment of the debt is based essentially on goodwill. The logic behind an unsecured claim is that if someone owes a debt and has the resources to eventually pay it off, they will do so. “This could also refer to a claim by a creditor to the extent that its lien on or right of set-off against the debtor’s property is worth less than the amount of the debt.”
