An unsecured claim is a payment request made to the bankruptcy court by a creditor who doesn’t have the right to sell property to satisfy the underlying debt. Credit card companies, medical providers, and utility companies often file unsecured claims.
Here’s how the process works.
When bankruptcy funds are available for distribution, the court will send out a notice instructing creditors to submit “proof of claim” forms by a particular deadline date. On the claim form, the creditor must describe the debt and tell the court whether the claim is a secured or unsecured claim, among other things. The responses help the bankruptcy trustee—the court-appointed individual responsible for monitoring the case—disperse the funds appropriately.
Whether a creditor’s claim is secured or unsecured will usually depend on the debt contract entered into between the creditor and the bankruptcy filer. If the borrower agreed to guarantee or “secure” payment of the debt by putting up collateral—valuable property that the creditor can sell if the borrower fails to pay as agreed under the contract—then the debt will be a secured debt. The security creates an ownership interest in the property called a “lien” and a creditor with a lien right will have a “secured claim” in bankruptcy. If the lender doesn’t have a lien, the debt will be an unsecured debt, and the creditor’s bankruptcy claim will be an unsecured claim.
(To learn more about bankruptcy claims, read Types of Creditor Claims in Bankruptcy: Secured, Unsecured & Priority.)
Additionally, the creditor must further categorize unsecured claims on the proof of claim form as either a priority unsecured claim (which entitles the creditor to be paid ahead of other claimants) or as a nonpriority unsecured claim (the claim category that the trustee will pay last). (Find out more in What Is a Nonpriority Unsecured Claim in Bankruptcy?) [LINK]
You’ll report both your priority and nonpriority unsecured debts on official form E/F: Creditors Who Have Unsecured Claims when you prepare your bankruptcy paperwork. (Read Completing Bankruptcy's Schedule E/F: Creditors Who Have Unsecured Claims for additional information.)