What is an Unsecured Claim?

An unsecured claim is a liability for which there is no collateral. Instead, credit was extended solely based on the creditor’s evaluation of the debtor’s ability to pay. When a debtor enters Chapter 11 bankruptcy protection, unsecured claims do not receive priority for payment; instead, these claims are only paid after all secured claims have been settled. These claims are reported to the bankruptcy court on a proof of claim form. Creditors state on the form a description of the debt, its amount, and whether it is a secured or unsecured debt.

What is an Under-Secured Claim?

A creditor may be under-secured, which means that the value of the collateral held is less than the value of the creditor’s claim. In this case, the creditor is granted a secured interest up to the value of its collateral, while any excess amount of its claim over the value of the collateral is classified as an unsecured claim (which is called a deficiency claim). This is a particular problem for a secured creditor when the court assigns a low value to the creditor’s collateral, since this means that more of its claim is shifted into the unsecured claims classification.