What Is an Unsecured Claim in Bankruptcy?

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. This article explains how the process works.

The Bankruptcy Notice in an "Asset Case"

When bankruptcy funds are available for distribution, the court will send a notice instructing creditors to submit "proof of claim" forms by a particular deadline. 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.

Unsecured vs. Secured Bankruptcy Claims

Whether a creditor's claim is secured or unsecured usually depends on the debt contract 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," giving a creditor a "secured claim" in bankruptcy. The claim will be unsecured if the lender doesn't have a lien.

To learn more about bankruptcy claims, read Types of Creditor Claims in Bankruptcy: Secured, Unsecured & Priority.

Priority vs. Nonpriority Bankruptcy Claims

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 a nonpriority unsecured claim, the claim category that the trustee will pay last.

Bankruptcy filers report priority and nonpriority unsecured debts on official form E/F: Creditors Who Have Unsecured Claims when preparing bankruptcy paperwork. Read Completing Bankruptcy's Schedule E/F: Creditors Who Have Unsecured Claims for additional information.