A liquidated debt is one with a clearly defined amount. The creditor and debtor together have a clear understanding of how much is owed.
Certainty about the size of a debt can come from an agreement between the borrower and the lender as to the amount owed, it could come from the terms of a contract, or It could come as the result of a legal proceeding. Let's look at how a debt gets liquidated, along with some examples to contrast it with unliquidated debt.
What Is Liquidated Debt?
Any debt with a specific and clearly stated amount due is a liquidated debt. Sometimes this is clear from the start, but other times you'll have to work with creditors—and possibly the courts—to arrive at an agreed-upon amount.
For many debts, it’s not hard to figure out what you owe. Your creditor makes it easy for you by sending you a statement, usually monthly, setting out your charges, the interest that’s accrued, any fees you’ve incurred, payments you made during the billing cycle, and your balance.
Your mortgage or auto loan are good examples of liquidated debts.
In other cases, though, it's not so obvious. This is particularly true with disputed or contingent debts.
- A debt is disputed when some element of the contract or agreement between the parties is unclear. One party may deny that it has any responsibility for the debt at all. The borrower may dispute the balance because they haven't gotten credit for payments they have made.
- A debt is contingent if some event must occur before the debtor becomes liable for the debt. A common example is a guarantor; the guarantor agrees to pay the debt, but only if the primary borrower defaults—doesn’t pay or otherwise fails to meet the terms of the agreement.
A particular debt can be unliquidated, disputed, or contingent. It could be two of those or all three.
How Debt Gets Liquidated
Debt disputes might arise when a creditor seeks to collect a debt from you, or if you have to file for bankruptcy and your creditors submit different debt claims to your trustee than what you provided. In this case, any of those debts are said to be unliquidated. Contingent debts would also be considered unliquidated since the amounts can't be settled until the event upon which it is contingent event occurs.
In these cases, you or your bankruptcy trustee would need to seek proof of those claims from creditors in order to resolve disputes and liquidate your debt. Even though creditors in a bankruptcy case might only receive a percentage of the debt back, this amount can't be determined until all debts are liquidated.
The status of debt is important in the context of a bankruptcy case. Debts have to be certain—or liquidated—before a bankruptcy trustee can pay a claim. Likewise, there must be no dispute or contingency pending.
Liquidated Debt vs. Unliquidated Debt
Whereas liquidated debt is debt in which the amount owed is known, unliquidated debt is that in which the total amount owed is unknown. This can arise in cases where debt amounts are in dispute or when they are contingent on other circumstances, such as a court case settlement. Unliquidated debt becomes liquidated once the final amount owed is determined, whether by agreement between parties or by court order.
Examples of Liquidated and Unliquidated Debt
Debt can arise from many sources. For our purposes, let's consider torts, which are civil wrongs that cause damage to others or the property of others, and a contractual debt example.
Liquidated Tort Debt
During rush hour one afternoon, you rear-ended the car in front of you. The driver ahead had to be taken to the hospital. After treatment and getting an estimate on fixing his car, the driver was out $4,379. He knows exactly how much because he’s got the bills and the estimate to prove it. Unless you have some reason to dispute the amount, the $4,379 is a liquidated debt.
But let’s say that the driver suffered an injury that will require treatment for an extended period of time. Until that treatment is completed, the amount of the debt is unliquidated because no one knows exactly how much it will take to make the driver whole again, if that's even possible. But, if you are found liable for the accident, you can come to an agreement to pay a certain sum to the driver and be released from any future responsibility for payments. Then the debt is liquidated because the parties have come to an agreement.
Instead of coming to an agreement with the driver, though, let’s say you dispute either how much you owe or whether you’re even liable for the accident. The injured driver takes you to court and the judge or the jury finds that you caused the driver’s injuries, thus ruling and you owe the driver $50,000. Because the court enters a judgment for a sum certain, the debt you owe is liquidated.
Liquidated Contractual Debt
Unliquidated debts aren’t limited to accident situations. They can occur when a contract is involved, also. For instance, say you borrowed money to buy a car. You have a contract that requires you to pay $300 per month for 36 months for a total of $10,800. That amount is already liquidated, but, after some time you come into a little money, which you decide to use to pay off the loan early. You end up paying a total of $9,500. That, too, is a liquidated amount because it’s easily calculated and you and the lender both agree that’s what you owe.
Consider what would happen if you lose your job and can’t make the payments anymore. The lender repossesses your car and puts it up for sale. If the lender doesn’t get enough from the sale to pay off your debt, you’ll be liable for the difference that remains. Until the car is sold, the debt is unliquidated because neither you nor the lender knows how much you’ll end up owing. There’s also a contingency in there. It’s possible, although highly unlikely, that the sale will bring in enough to pay the loan in full. Either way, the debt can't be liquidated until the car is sold.
- Liquidated debts are those whose amounts are known and agreed upon.
- If there are disputes about a debt, or it is contingent on another event, then the debt is said to be unliquidated.
- Sometimes these disputes can be resolved between parties or in reference to a contract, but in other cases, the courts will have to be involved to liquidate the debt.