What is a Secured Creditor?

A secured creditor is a lender that has placed a lien on certain assets of a borrower. A lien allows the creditor to seize those assets designated as being the collateral of the borrower. When a lien has been recorded against an asset, the creditor can move quickly to acquire the asset in the event of a payment default by the borrower. The creditor can then liquidate the asset in order to obtain payment. In the event of a bankruptcy, secured creditors must be repaid in full before any funds are made available to unsecured creditors.

Example of a Secured Creditor

For example, a mortgage lender is a secured creditor, because it has a lien on the property for which it is providing a mortgage. If the mortgage holder does not pay on a timely basis, the lender takes back the property. The lender is no longer a secured creditor as soon as a borrower pays off a mortgage, obligating the lender to remove the lien from the borrower’s property.

Unsecured Creditors

An unsecured creditor does not have a lien on the assets of a borrower. If the borrower defaults, this class of creditor cannot seize any assets in compensation. Instead, it must pursue voluntary repayment by the borrower, or wait for a distribution from the residual assets of the borrower, if it ever enters bankruptcy protection. Examples of unsecured creditors are suppliers and credit card issuers.