What is an unsecured creditor?

An unsecured creditor is a creditor who does not have a claim on specific property of the debtor in the event of a default. This means that if a debtor didn’t fulfill their financial obligations, the unsecured creditor doesn’t have a legal right to take a certain asset from the debtor in order to receive payment. Unsecured creditors can include credit card companies, medical bills, or other forms of purchases or loans that weren’t backed by a specific asset. In California, the priority of claims is established by the California Code of Civil Procedure 726. This is known as the “order of preference” in California, and it states that unsecured creditors should be paid in the order they were incurred. When a debtor is unable to satisfy all of their creditors, the unsecured creditors are usually likely to receive a smaller amount than the secured creditors. In the event of bankruptcy, unsecured creditors may not receive any of the money owed. Most bankruptcies are classified as “no asset” bankruptcies, meaning that the debtor does not have any assets for the creditors to collect from. Unsecured creditors then must look to either the government or another entity to satisfy their debt. If the debtor does have assets, unsecured creditors may receive partial payment. However, because of the order of preference in California, the secured creditors must be paid first before the unsecured creditors.

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