Unsecured Creditors Face Significant Risks

2008-05-13 11:27:00

( Financial )



Unsecured creditors, whether individuals, businesses, or governmental agencies, are the ones who extend credit to debtors without requiring them for any property as collateral security. While you may find it favorable to secure an unsecured line of credit or unsecured debt, unsecured creditors are more at risk with this kind of transaction especially if it is necessary for you to file a bankruptcy proceeding.

Unsecured creditors may still be able to collect their claims but they have to resort to legal action before a court with proper jurisdiction. The claims of unsecured creditors will only be entertained after the claims of the secured creditors, the cost of administrative expenses, and other preferred claims are satisfied. Only the shareholders and other parties who are holders of interest with the assets of the bankrupt-debtor are ranked below the unsecured creditors.

Unsecured creditors would be lucky enough if there would be left after the satisfaction of the above-mentioned claims. And in case there are several unsecured creditors in a bankruptcy proceeding, their claims will be satisfied on pro rata basis.

Because of the substantial risks that unsecured creditors have in lending an unsecured debt, it is not surprising that the interest rate for this type of loan is much higher than the secured debts. In a secured debt, the creditors have your property as collateral to the loan. Secured creditors can always repossess or foreclose that property in case you missed payments or violate any of the terms of the loan conditions.

So the next time that you would be getting an unsecured credit card, you should be able to understand why you have to pay a higher interest rate. This should not be an excuse, however, to fail to shop around. You would still be able to get the best deals from unsecured creditors.


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