Legal Definitions - unsecured claim

An unsecured claim refers to a debt or obligation where the creditor does not have a legal right to seize specific property (known as collateral) from the debtor if the debt is not paid. Instead, the creditor relies solely on the debtor's general promise to pay and their overall financial standing. If the debtor defaults or files for bankruptcy, creditors holding unsecured claims typically have a lower priority for repayment compared to those with secured claims, who can take possession of the pledged collateral.

Here are some examples to illustrate this concept:

• Credit Card Debt: Imagine Maria uses her credit card to purchase new clothes and pay for streaming services. The credit card company has an unsecured claim against Maria for the outstanding balance. If Maria fails to make her payments, the credit card company cannot legally repossess her clothes or seize any specific asset she owns, such as her car or home, to cover the debt. Their claim is based on her general promise to repay the borrowed funds.

• Medical Bills: Consider David, who receives emergency treatment at a hospital and is subsequently billed for the services. The hospital holds an unsecured claim for the cost of David's treatment. If David is unable to pay the bill, the hospital cannot take possession of any of David's personal property, like his furniture or electronics, to recover the debt. They must pursue other collection methods, such as sending the bill to a collection agency or filing a lawsuit, but without the right to seize specific assets.

• Supplier Credit for a Business: A small graphic design firm orders new office supplies, such as paper, ink cartridges, and pens, from a stationery supplier on a 60-day credit term. The stationery supplier has an unsecured claim against the graphic design firm for the cost of these supplies. If the firm fails to pay within the agreed 60 days, the supplier cannot repossess the used paper or ink, nor can they seize other assets of the design firm like its computers or office furniture. Their claim rests on the credit agreement and the firm's general obligation to pay its invoices.