What is an Unsecured Creditor?

An unsecured creditor is an entity that has extended credit to another party without first obtaining a collateral agreement. This means that the creditor has no claim on the other party’s assets if it does not pay the amount owed; this is known as an unsecured claim.

If the debtor is subsequently unable to pay, then the unsecured creditor will not be eligible for reimbursement until the claims of all secured creditors have been settled. At that time, the unsecured creditor will be paid on a pro rata basis along with all other creditors in the same classification. This will likely result in a partial payment or no payment at all. Creditors typically take on this increased level of nonpayment risk because of competitive pressure to offer the same terms to customers that their competitors are offering.

Examples of Unsecured Creditors

A supplier typically issues trade credit without a collateral requirement, and so is classified as an unsecured creditor. Issuers of commercial paper do so without any collateral provision, so the buyers of these securities are also unsecured creditors. Some other types of unsecured creditors are landlords, credit card companies, utilities, and doctors.