17 June 2019

Secured and Unsecured Creditors Differences Explained

Creditors are individuals or entities who are entitled for payment by their debtors. When a debtor files a bankruptcy, then he/she is legally obliged to pay back the creditors according to the order of priority.

A Lien:

A lien acts a guarantee of repayment of a loan by the debtor to the creditor. It offers a legal right to the creditor to take the ownership of debtor’s property.

The asset subjected to ceased by the creditors is only enforceable when the debtor defaults from the payment. The creditors then enforce a lien with the authority and claim for the asset of the debtor.

Here is an Example:

Suppose Jack wants to purchase a car but due to lack of fund, he decided to take a loan from bank. After sanctioning the loan, he purchased the car and pays the seller using the money he received through loan.

However, to get the loan, jack grants a lien on the vehicle in favor of the bank.

Now, the bank has the power to execute a lien if jack fails to repay the loan within the set period. Upon executing, the bank (the lien holder) can seize the car and sell it as repayment.

Mechanic’s Liens:

This type of lien is used by suppliers and subcontractors. Mechanic’s liens are legal claims against remodeled properties.

For Example, Jack decided to remodel his Kitchen. He paid the general contractor for all the works but the general contractor doesn’t pay the subcontractor (who supplied the chimney etc.) then the subcontractor has the right to come after you and your remodeled property.

We hope you have gained a fair insight about Lien, now let’s move forward

Who are Secured Creditors?

Secured Creditors are those individuals or entities who possess a lien on any of your asset.

Failing to pay the debt in time will empower the creditors to use the lien against you and claim your assets in return. Some Secured Creditors includes Mortgage lenders and Car Lenders.

Examples of Secured Creditors:

When it comes to priority, banks hold a preferential position with a lien on properties or other assets of the debtors.

Next contender for fixed charge is an invoice factoring company, who owns a fixed charge on the assets.

Other secured creditors include lenders who have authority over your non-constant assets such as inventories, machineries and equipment.

Who are Unsecured Creditors?

Contrary to Secured Creditors; unsecured creditors don’t have a lien on any property of the debtors. Credit Card Providers are the perfect example of Unsecured Creditors.

Creditors are either paid voluntarily by the debtors or through an involuntary lien. In Involuntary lien, the creditors may sue you and get your properties seized by a sheriff.

Categories Falls under Secured Creditors:

There are two subcategories of Secured Creditors: Fixed and Floating

Fixed charge

A lender can help a debtor over a specific asset if that particular asset was financed by the lender itself.

For example, a banker can have lien over your premises, equipment, or machinery, provided the bank pays for the assets.

It is also applicable to factoring companies, if they provide financial support to the debtor’s company.

Floating charge

Floating Charge is a lien over non-constant assets of the debtors. When creditors are under the lien of floating charge, then they are entitled to change the quantity and volume of the assets.

For Example, if Jack put his company’s inventory as collateral for a loan, then the creditor will have the authority to sell, restock or alter the value and quantity of the inventory.

Categories Falls under unsecured Creditors:

Unsecured Creditors are just above the shareholders of the company, when it comes to payment after the liquidation of a company.

They get paid after the secured creditors and before the shareholders. Suppliers, Contractors, customers, credit card providers are some of the few examples of unsecured creditors.

There are 3 types of Unsecured Creditors: Preferred, Deferred and Ordinary Creditors.

Preferred Creditors:

When it comes to Unsecured Creditors, they have the upper hand. They are eligible to receive a divided before other unsecured creditors.

Deferred Creditors:

Creditors under this subcategory are the last to receive any repayment during a personal bankruptcy. They are only eligible when all the other creditors are repaid by the debtors.

Ordinary Creditors

They those who are excluded from both the subclasses of Unsecured Creditors. Debts under ordinary creditors includes credit cards, income taxes, and bank loans etc.


Hopefully this article explained enough for you to understand the differences between Secured and Unsecured Creditors. If you have any other questions please contact us for a free consultation.

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tags: Creditors' Rights, Debt Collection
Jonathan B. Vivona

Jonathan B. Vivona

Jonathan B. Vivona is the founder of our firm and is based in Alexandria, VA. He has represented bankruptcy clients in the Northern Virginia area for his entire professional career.

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