Question

Explain the positions of secured, preferred and unsecured creditors in the event of a bankruptcy.

Provide examples, where appropriate.

Answer 1

Secured Creditor - A secured creditor is defined as the loan or credit provider who has the direct claim to the debtors' asset or a property or a possession as discussed during the time of credit in case of a bakruptcy. Mortgage, Hypothec, pledge, charge or lien on the property are performed.

Example - Personal loan taken from a secured creditor by providing the piece of land as a collateral.

Unsecured Creditor - If you have provided a loan to someone and in case he bankrupts, you have no direct right over his or her assets, possessions or property. In other words, you are an unsecured creditor if you have lended money without obtaining specific assests as collateral. There is a high risk to the creditor. If the borrower fails to repay the loan, you will have to win a lawsuit first in order to take possession of any of his/her assets as an unsecured creditor.

Example - Credits provided by the credit card companies or the case of a landlord and renting person.

Preferred Creditor - A preferred or a preferential creditor is the one who has the preference to get right over the debtor's assets in case the debtor bankrupts. In this case, some creditors are given the priority over the ordinary creditors.

Example - The employees of a company are considered as the preferred creditors in case the company is going to bankrupt. Employees will be essentially paid their salary first.