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Liquidated Debt vs. Unliquidated Debt

Dena Standley | January 16, 2023

Dena Standley
Legal Expert, Paralegal
Dena Standley, BA

Dena Standley is a seasoned paralegal with more than 20 years of experience in legal research and writing, having received a certification as a Legal Assistant/Paralegal from Southern Technical College.

Edited by Hannah Locklear

Hannah Locklear
Editor at SoloSuit
Hannah Locklear, BA

Hannah Locklear is SoloSuit’s Marketing and Impact Manager. With an educational background in Linguistics, Spanish, and International Development from Brigham Young University, Hannah has also worked as a legal support specialist for several years.

Summary: Liquidated debt involves a debt with a known amount that is currently owed and not disputed by either the debtor or creditor. On the other hand, an unliquidated debt is unknown, disputed by at least one of the parties involved, and and is contingent upon a future event.

The term liquidation can be confusing. For example, you say you have liquidated the debt when you pay off your credit card debt. However, that is not the same as a liquidated debt. Additionally, if real property is seized to pay off your outstanding balance, that's property liquidation.

So what is liquidated debt or unliquidated debt?

Liquidated debt is a debt you owe whose amount is certain, and both you and your creditor agree on the amount. On the flip side, unliquidated debt is debt whose amount is unclear or disputed. Various situations can result in question mark amounts. Eventually, though, each debt needs to be liquidated before you can pay it off.

It's also important to know the state of each debt when filing for bankruptcy because you need to include every debt in the paperwork. Failure to clearly describe the debt can result in a prolonged email tennis game. You don't want that.

This article will explain debt and liquidation, and reasons a debt may be considered unliquidated, and more.

First, let's explore some examples of liquidated debt vs.unliquidated debt.

Examples of liquidated and unliquidated debt

When you know and agree with what your creditor or vendor is asking from you, that's a liquidated debt. An example of a liquidated debt:

  • An invoice you haven't paid.
  • A credit card statement you accept as correct.

Liquidated debts can be as simple as in the examples above. However, they may sometimes require an agreement between the debtor and the creditor or a court judgment to decide on the amount.

If you disagree on the amount, have to wait for certain events before you know how much you owe, or the amount is contingent on possible outcomes, that debt is unliquidated. A good example of unliquidated debt is:

  • The money you owe your defense attorney in case of a car accident. Your lawyer will generally ask for a percentage of the 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.

Staying with the car accident scenario, if you are at fault and the victim needs medical help and vehicle repairs, their insurance company may sue you to recover the expenses incurred. Until the victim has received all necessary treatments, you don't know the total payable amount. During this waiting period, the eventual money you will pay is unliquidated.

The table below summarizes these differences.

Liquidated Debt vs. Unliquidated Deb

Liquidated Debt Unliquidated Debt
Known amount Unknown amount
Debtor and creditor agree on the amount One or both parties dispute the amount
Debt is owed at present Debt is contingent on a future occurrence

Reasons for unliquidated debt

Even if you are always on top of your finances, you may still deal with unliquidated debts. Some unavoidable circumstances result in unliquidated debt, such as:

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

Let's take a closer look at each of these reasons for unliquidated debt.

Disputed debts

Errors are common in consumer debt records. You may catch these whenever you request your credit report from the major reporting bureaus or when a debt collector reaches out to collect the money you don't recognize. You can legally challenge the wrong information by filing a dispute with the creditor or the bureaus.

The debt is considered unliquidated when the amount is under investigation until both parties agree. The disputing process is simple if you have the right sample dispute letter.

Contingent debts

You may never know how much you owe until certain events occur. If you cosign a loan for a friend, for instance, you know that you will be liable if the friend fails to keep up with the repayments. However, you don't know if they will default and how much you will need to pay if they do. These 'if' debts are contingent because they depend on matters outside of your control.

Waiting on a court order

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

So, why is it necessary to know if a debt is liquidated or unliquidated?

Debt collectors may not sue for unliquidated debts

While collecting a liquidated debt is straightforward, collecting unliquidated debt requires more steps. The debt collector has to contact you to ask you to pay for liquidated amounts. If you fail to pay as per the contract, they may sue you and obtain a judgment against you to recover their money through other legal means.

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

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

Unliquidated debt makes bankruptcy more complicated

Filing for bankruptcy is a stressful affair. It helps if you know what to expect through the process.

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

Additionally, it's the trustee's job to recover money from your debtors to pay your creditors during the insolvency. Therefore they need to know how much you owe to determine how much each creditor gets based on the total amount they hope to recover.

In summary

Liquidated debt is a debt whose amount is known and accepted.

On the other hand, unliquidated debt is a debt whose amount is not clear either because it's disputed or because it has to wait for future events to be determined.

Debt collection and filing for bankruptcy may differ depending on whether the owed amount is known or unknown. While it's easier for creditors and debt collectors to sue you for liquidated debt, cases of unliquidated debt are a little more complicated.

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