Unliquidated Debt: Everything You Need to Know
Unliquidated debt is an amount of debt that is owed based on the terms of a contract or is under dispute.3 min read
Unliquidated debt is an amount of debt that is owed based on the terms of a contract or is under dispute.
This type of debt typically must be determined by reviewing the terms of an agreed-upon contract. If the debt amount is the subject of a dispute, it would be considered unliquidated. Businesses are responsible for unliquidated debt as soon as the dispute over the required amount has been resolved in a legal way. However, this action changes the debt from unliquidated to liquidated. When debt is unliquidated, the exact amount hasn't been determined.
One example would be if you sued another person for personal injuries sustained during a car accident. In order to take this legal action, you hire an attorney. The attorney's agreement is to take your case under a contingency fee of 33 percent of the damages recovered. The debt you owe to your attorney will be considered unliquidated until the lawsuit is resolved because you don't know whether you will win the case or how much the damages will be if you do win.
Similar to a contingent debt, you must list any unliquidated debts on your financial records, even if you don't know the value of the debt amount. After the debt amount becomes clear and is no longer under dispute, its classification shifts to liquidated. It is possible for both unliquidated and liquidated debt to be discharged as part of a bankruptcy filing.
When an individual owes a debt to a creditor based on an event that hasn't taken place yet, this is called "contingent debt." Repayment of a contingent debt may never be required because it could be tied to an event that never occurs. A contingent debt is identified when the debt is probable due to a contingent situation, and the amount can only be estimated but is not finalized.
When filing bankruptcy, you may wonder why you would need to list a debt in the documents that might not be required. However, a contingency debt is technically an obligation because it could come up in the future. In many bankruptcy cases, contingency obligations can be discharged as part of the proceedings.
One example of a contingency debt is if you were to cosign on a vehicle loan for a family member. You could be liable for the debt if your family member defaults on the loan, which obviously may or may not occur. This would be considered contingency debt that could be discharged during a bankruptcy filing.
You can dispute a debt if you and your creditor are not in agreement. The dispute could arise from the:
- Amount of the debt
- The overall existence of the debt
For instance, Citibank sends you a notice that your outstanding debt is $3,000, but your records show that the debt is $1,500. The next step would be listing Citibank as your creditor and including the full amount owed and shown as outstanding. You would need to identify that you are disputing the debt.
When you include the amount on your bankruptcy filing documents, it becomes eligible to be discharged. Doing this also alerts the trustee in your bankruptcy case that your creditor possibly shouldn't receive the full amount when distributing your assets.
Listing Debts on Bankruptcy Papers
When completing bankruptcy paperwork, you must include all debts. On the documents, the debts are also called "claims" because your creditor can claim the funds. In many cases, the claim amount is straightforward and won't be disputed. If you are behind on the mortgage loan on your house, you would need to list the amount of total debt owed on the house as the claim amount. If you owe rent to your landlord, include the claim amount as the total due to your landlord.
Liquidated vs. Unliquidated Claims
When comparing liquidated and unliquidated claims, it's important to understand the agreement made by the parties involved in a bankruptcy proceeding. One agreement in bankruptcy is called an "accord" and allows the involved parties to discharge one obligation by accepting another consideration as a substitute. The execution of this agreement is referred to as "satisfaction."
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