What Is Liquidated Debt?
Have you ever wondered whether you actually owed a creditor some amount of money? Have there ever been instances where you just weren’t sure if you'd been charged, or whether your payment had been accepted, or even if you were responsible for a debt at all.
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.
But, what if you had an account that you knew you were responsible for but no one had yet been able to figure out how much you actually owe so that you could pay it off?
What we’re talking about is whether the debt is liquidated. A debt is liquidated when the amount owed is certain. That certainty 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.
Unliquidated vs. Disputed or Contingent Debt
Closely related to the concept of liquidated debt is dispute and contingency.
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 he hasn’t gotten credit for payments he’s 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 debt can be unliquidated, disputed, or contingent. It could be two of those or all three.
Liquidated Debts in Bankruptcy
The status of a 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.
Examples of Liquidated and Unliquidated Debt
Here are some 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. We'll also look at debt that arises from contract.
Liquidated Tort Debt
The Car Accident, Part 1: During rush hour one afternoon, someone rear ended you, and 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.
The Car Accident, Part 2: 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 at all. 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.
The Car Accident, Part 3: So, instead of coming to an agreement with the driver, let’s say you dispute either how much you owe, or whether you’re even liable for the accident (after all, someone rear ended you first.) The injured driver takes you to court and the judge or the jury finds that: 1. You caused the driver’s injuries, and 2. You owe the driver driver $50,000. Because the court enters a judgment for a sum certain, the debt you owe is liquidated.
You can apply this to similar situations. Your dog bites your neighbor. You sue your neighbor for defamation for lying about the bite on social media. You spray paint "dog hater" on your neighbor's fence. You get the picture.
Liquidated Contractual Debt
The Car Loan: Unliquidated debts aren’t limited to accident situations.
They can occur when a contract is involved, also. For instance, 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. I would argue that that amount is liquidated. But, after some time you come into a little money and 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 happens when 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—the deficiency. 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. So, the contingency is whether or not the sale pays off the loan.