Unsecured Creditor: Understand what it means and what the legal options are in these cases!

If you have ever come across the term “unsecured creditor" and are confused about its meaning, know that you are not alone. Many people, especially those involved in debt or bankruptcy issues, end up seeking to understand more about this term in the legal and financial world.

In this text, we'll explain in a simple and objective way what an unsecured creditor is, their position relative to other creditors, and how they fit into the debt repayment process. Understanding these concepts is essential for anyone who wants to manage their finances more safely and conscientiously.

What is an unsecured creditor?

An unsecured creditor is one who holds an unsecured claim on the debtor's assets. This means that, in the event of default or bankruptcy, the unsecured creditor has no priority or specific guarantee to receive what is owed to them, remaining at the bottom of the payment list, after secured creditors.

Unlike creditors who have real guarantees, such as mortgage creditors (who have real estate as collateral) or pledged creditors (who have movable property as collateral), an unsecured creditor cannot rely on a specific asset to ensure payment of the debt.

It depends solely on the debtor's financial standing and the legal order of priority established for debt repayment. Therefore, the risk is higher, and consequently, the likelihood of receiving the amounts owed may be lower in bankruptcy or judicial reorganization proceedings.

Types of creditors and their differences

Here are the main types of creditors, with their characteristics summarized:

Now, let's explore the differences in some key points:

• Unsecured Creditors: They have no collateral over the debtor's assets. They are at the end of the payment list and receive payment only after secured and privileged creditors have been paid.
• Mortgage Lenders: They have a property as collateral. If the debtor defaults, the creditor can seize the property to recover the amount owed, which gives them greater security.
• Creditors with Pledge: They have a movable asset, such as a car or jewelry, as collateral. This asset can be auctioned to pay the debt, also offering greater protection to the creditor.
• Privileged Creditors: They have legal priority in receiving payments, as in the case of workers whose wages are pending. Even without collateral, the law ensures that they receive payments before other creditors.

In short, the unsecured creditor is in a position of disadvantage because he only receives payment after all secured creditors and privileged creditors have been paid, making his risk much greater.

Some examples of unsecured creditors

Unsecured creditors are present in a variety of everyday situations, especially in commercial and labor relations. Here are some common examples of who can be classified as an unsecured creditor:

Examples of Unsecured Creditors

• Service and product providers: Companies that supply goods or services without requiring specific collateral (such as regular supply contracts) fall into the category of unsecured creditors. If the customer defaults, they have no specific assets as collateral.
  

  Example: An equipment maintenance company provides services to a factory, but in the event of default, it does not have any of the factory's assets as collateral for payment.

• Employees with delayed salaries: In certain situations, employees who have not received outstanding wages may become unsecured creditors, especially when they do not have legal priority (cases of unsecured wage agreements).
  

  Example: An employee hired temporarily, without a formal contract and with pending payments, may be classified as an unsecured creditor in a judicial recovery.

• Independent service providers: Independent professionals, such as lawyers, consultants, or freelancers, also qualify as unsecured creditors when they perform work for a company and do not receive the agreed payment.
  

  Example: A freelance designer who develops a website for a company, but after delivering the work, does not receive the agreed-upon payment.

• Suppliers without specific guarantees: Companies that sell inputs or materials to industries, without requiring a specific good as payment guarantee, also fall into this category.
  

  Example: A raw material supplier sells large batches of products to a company, but has no guarantees on specific assets in the event of default.

What are the rights of unsecured creditors?

Unsecured creditors have the right to seek recovery of the amount owed to them, but because they lack collateral, they face greater difficulties and restrictions. The main legal actions available to them are:

• Collection action: The creditor can file a lawsuit to collect the amount owed. If the ruling is favorable, the debtor may be forced to pay the debt.
• Participation in bankruptcy or judicial recovery proceedings: The unsecured creditor can qualify for credit in these processes, but will have to respect the legal order of payment, which puts him at a disadvantage.

Order of preference in bankruptcy and judicial recovery

Brazilian law, especially the Bankruptcy Law (Law No. 11,101/2005), establishes an order of priority for payment to creditors. The unsecured creditor, because he has no guarantees, occupies the last positions on the payment list. Before that, the following are paid:

1. Labor creditors (with a limit of up to 150 minimum wages);
2. Creditors with real guarantees (mortgages, pledges, among others);
3. Tax creditors (debts with the government).

Only after these debts are paid off is the unsecured creditor entitled to receive payment, which often reduces their chances of recovering the full amount.

What risks does the unsecured creditor face?

Unsecured creditors face several risks when granting unsecured credit. Here are the main ones:

• Low priority on receipt: Because they are last in the payment order in bankruptcy or judicial reorganization cases, unsecured creditors have a lower chance of receiving the full amount of their debt. Other creditors with real collateral or legal privileges are paid first.
• Absence of real guarantees: Without collateral on specific assets of the debtor (such as real estate or vehicles), the unsecured creditor cannot use any asset to secure payment. This means that if the debtor defaults on their obligations, the creditor has no direct path to recover the debt.
• Uncertainty in insolvency cases: In insolvency situations, the debtor may not have sufficient assets to cover all debts. Since the unsecured creditor only receives payment after other priority creditors, they run the risk of recovering nothing.
• Greater vulnerability to delays: Unlike secured creditors, who can execute the assets given as collateral, the unsecured creditor depends exclusively on the good faith and financial situation of the debtor, which increases the chance of delays or total default.

These factors make the unsecured creditor more vulnerable compared to other creditors.

How can he protect his rights?

Although unsecured creditors face greater risks, there are measures that can be taken to minimize these risks and protect their rights:

Preventive measures

• Rigorous credit analysisBefore granting credit, it's essential to carefully assess the borrower's financial health. A thorough credit analysis, including checking default records and financial history, can prevent future surprises.
• Well-written contract: Having a clear and detailed contract, with all payment terms clearly established, is a way to formalize the debtor's obligation. Even without real guarantees, a robust contract facilitates legal collection.
• Customer diversification: Don't concentrate credit on just one or a few debtors. Diversification helps reduce the impact of a single customer's default on the creditor's cash flow.

Legal action in case of default

If the debtor fails to fulfill his obligations, the unsecured creditor may take the following legal measures:

• Collection action: If the debtor does not pay voluntarily, the creditor can file a collection action in court, seeking a favorable decision to force payment.
• Protest of titles: The creditor can protest the debt, which can put pressure on the debtor to pay the amount, as a protest damages their financial reputation.
• Qualification in bankruptcy or judicial recovery proceedings: If the debtor enters bankruptcy or judicial recovery, the unsecured creditor must enable his debt in the process to try to recover at least part of the amount.

Although unsecured creditors face greater risks due to the lack of collateral, they can still adopt preventative practices and take legal action to protect their rights. With a careful approach and thorough analysis, it is possible to reduce the chances of default and, in cases of bankruptcy or judicial reorganization, take appropriate action to ensure the best possible outcome.