What does Unsecured Creditors mean?
An unsecured creditor is a lender or entity which a company or individual owes money for good or services, but the creditor does not have collateral or a claim to the assets of the borrower to secure the loan against default. Unsecured creditors also do not have the automatic legal right to repossess property if the debtor defaults and fails to repay their loan.
For this reason, unsecured creditors generally charge a higher interest rate when they loan money to compensate them for the risk. They do, however, under some conditions and in certain states, have the right to file lawsuits or sue to obtain access to accounts if the borrower fails to make payments. If the borrower files bankruptcy the unsecured creditor will not receive payment until secured creditors have been paid. A secured creditor, on the other hand, has property or assets serving as collateral for the debt.
If the debtor fails to make payments, the creditor can take the property.
Common types of unsecured creditors include those providing credit cards, student loans, utility services, medical services, unsecured personal loans, unsecured lines of credit, and landlords (in states which do not allow landlord liens).
What Happens If You Don't Pay an Unsecured Debt?
Debtors who fail to make unsecured debt payments can have their payment delinquency reported to the credit agencies. They may also eventually have a lawsuit filed against them in court. In some states if the court awards a judgment against the debtor the unsecured creditor may be allowed to seize certain assets, garnish the debtor's wages or bank accounts, or force them to sell real property for repayment.
Some states do not allow certain unsecured creditors, such as a credit card company, to garnish the debtor's wages. Other states allow the wage garnishments but have imposed a wage garnishment limit.