Liquidated Debt vs. Unliquidated Debt: What’s the Difference?

The term liquidation can be confusing when discussing debt. You might say you liquidated your credit card debt when you paid it off. However, that’s different from liquidated debt itself.

Liquidated debt is a debt you owe whose amount is certain. Both you and your creditor agree on the amount. Unliquidated debt is debt whose amount is unclear or disputed. Various situations can result in these question mark amounts.

Understanding the difference matters for several reasons. Debt collectors face more challenges suing for unliquidated debts. Bankruptcy filings become more complicated with unliquidated debts. You need to include every debt in bankruptcy paperwork. Failure to clearly describe each debt can prolong the process.

Examples of Liquidated and Unliquidated Debt

When you know and agree with what your creditor asks from you, that’s liquidated debt. Common examples include:

• An unpaid invoice
• A credit card statement you accept as correct
• A medical bill you don’t dispute

Liquidated debts can be simple. However, they may sometimes require an agreement between debtor and creditor. A court judgment may decide the amount.

If you disagree on the amount, that debt is unliquidated. You may have to wait for certain events before knowing how much you owe. The amount might be contingent on possible outcomes.

A good example of unliquidated debt involves car accident scenarios. Your defense attorney may ask for a percentage of damages you win in court. You don’t know what the judge will award you. Therefore, you don’t know how much you owe the attorney.

If you’re at fault in an accident, the victim’s insurance company may sue you. They want to recover expenses for medical help and vehicle repairs. Until the victim receives all necessary treatments, you don’t know the total payable amount. During this waiting period, the eventual money you’ll pay remains unliquidated.

Key Differences at a Glance

Liquidated Debt:

• Known amount
• Debtor and creditor agree on the amount
• Debt is owed at present

Unliquidated Debt:

• Unknown amount
• One or both parties dispute the amount
• Debt is contingent on a future occurrence

Reasons for Unliquidated Debt

Even if you’re always on top of your finances, you may deal with unliquidated debts. Some unavoidable circumstances result in unliquidated debt:

• Disputed debts
• Contingent debts
• Waiting on a court order

Disputed Debts

Errors are common in consumer debt records. You may catch these when you request your credit report from the major reporting bureaus. You might discover them when a debt collector reaches out to collect money you don’t recognize.

You can legally challenge wrong information by filing a dispute with the creditor or the bureaus. The debt is considered unliquidated when the amount is under investigation. It remains that way until both parties agree.

Contingent Debts

You may never know how much you owe until certain events occur. If you cosign a loan for a friend, you know you’ll be liable if they fail to keep up with repayments. However, you don’t know if they will default. You don’t know how much you’ll need to pay if they do.

These ‘if’ debts are contingent because they depend on matters outside your control.

Waiting on a Court Order

Sometimes, you have to wait for the court to decide what you owe. Such situations may occur if a creditor sues you. You may know the amount they’re suing for. Ultimately, the decision is with the judge.

Debt Collectors May Not Sue for Unliquidated Debts

Collecting a liquidated debt is straightforward. The debt collector contacts you to ask you to pay. If you fail to pay as per the contract, they may sue you. They can obtain a judgment against you to recover their money through other legal means.

For unliquidated debt, the collector must prove they can legally collect the money. They must provide documentation to support the stated amount. The debt collector or creditor cannot get a default judgment if the amount is not specified.

The additional steps require separate court hearings and extra costs in filing the claim. As a result, collectors may hesitate to sue you until a debt is liquidated.

If you’re facing a lawsuit for a liquidated debt, you need to respond quickly. Our partner Solo can help you respond to a debt lawsuit in just 15 minutes. You can also use their service to send letters to collectors and even settle your debt.

Unliquidated Debt Makes Bankruptcy More Complicated

Filing for bankruptcy is a stressful affair. Understanding the liquidation status of your debts helps you know what to expect.

When filing for Chapter 7 bankruptcy, the trustee determines the amount unsecured creditors receive by pro-rata. That means they’re entitled to a percentage of available funds. Your bankruptcy trustee can’t prorate the amount such creditors receive if the amount owed is unknown.

It’s the trustee’s job to recover money from your debtors to pay your creditors during insolvency. They need to know how much you owe to determine how much each creditor gets. The calculation is based on the total amount they hope to recover.

How to Handle Liquidated vs. Unliquidated Debt

When dealing with liquidated debt, respond promptly to collection attempts. Review all documentation carefully. Verify that the amount is correct before making payments.

For unliquidated debt, document everything related to the dispute. Keep records of all communications with creditors. If the debt depends on future events, track those developments closely.

If you’re being sued for a liquidated debt, responding with a written Answer is critical. Failing to respond can result in a default judgment against you. The collector can then garnish your wages or freeze your bank account.

When to Seek Professional Help

Some debt situations require professional guidance. Consider seeking help if:

• You’re being sued by a debt collector
• You’re considering bankruptcy
• You can’t determine if a debt is valid
• A creditor refuses to provide documentation
• You need to negotiate a settlement

Understanding whether your debt is liquidated or unliquidated affects your legal options. It impacts how collectors can pursue you. It influences your bankruptcy filing process.