Unsecured creditors are those who have extended loans, sold goods or provided services to a company without obtaining a specific lien, mortgage or pledge on the debtor’s assets as collateral for promised repayment.
Key Characteristics of Unsecured Creditors:
- Hold general unprioritized claims against the debtor’s bankruptcy estate.
- Rank below secured creditors whose loans are backed by specifically identified property with seize-and-sell rights.
- May include employees owed back wages, tax authorities, trade suppliers and those with legally binding contractual agreements.
Example:
When the retailer declared bankruptcy, unsecured vendors faced uncertainty over recovering even a percentage of amounts outstanding as secured lenders had primacy on available assets.
Takeaways:
While loans carry higher risk without collateral, unsecured creditors play a major role in corporate financing. Prudent credit assessments mitigate defaults leaving general creditors vulnerable in insolvency proceedings.