What is an unsecured creditor?

Definition of Unsecured Creditor

An unsecured creditor is often a vendor or supplier that:

  • Shipped goods to a customer as part of a sale on credit
  • Has not been paid
  • Does not have a lien on the customer's assets

If the customer files for bankruptcy, the supplier's unsecured claim is likely to be settled only after the secured creditors' claims and the priority unsecured creditors' claims are settled.

Example of Unsecured Claim

Assume that on July 1, Supplier Company sells $10,000 of merchandise to a retailer with credit terms of net 30 days. Supplier Company records the transaction with a $10,000 debit to Accounts Receivable and a $10,000 credit to Sales. Since Supplier Company does not have a lien on the retailer's assets, Supplier Company is an unsecured creditor.

On August 1, the retailer informs Supplier Company that it is unable to pay the $10,000 it owes. On August 20, the retailer files for bankruptcy protection. Supplier Company learns that the retailer owes $2 million on bank loans that are secured by liens on all of the retailer's assets (which have a value of less than $1 million). Hence, the Supplier Company is unlikely to collect any of its $10,000 in Accounts Receivable.

This example points out the possible risk of selling goods or providing services with credit terms.