Key Takeaways

  • Unliquidated debt is a debt for which the exact amount is not yet determined or is under dispute.
  • This type of debt often arises from lawsuits, personal injury claims, or unresolved contract terms.
  • In bankruptcy, unliquidated, contingent, and disputed debts must all be listed, even if amounts are uncertain or payment isn’t guaranteed.
  • A claim becomes liquidated once the debt amount is finalized or settled, allowing the bankruptcy trustee to calculate distributions.
  • Listing all types of claims, including unliquidated ones, ensures accurate disclosure and potential discharge in bankruptcy.

Unliquidated debt is an amount of debt that is owed based on the terms of a contract or is under dispute.

Unliquidated Debt

This type of debt typically must be determined by reviewing the terms of an agreed-upon contract. If the debt amount is the subject of a dispute, it would be considered unliquidated. Businesses are responsible for unliquidated debt as soon as the dispute over the required amount has been resolved in a legal way. However, this action changes the debt from unliquidated to liquidated. When debt is unliquidated, the exact amount hasn't been determined. 

One example would be if you sued another person for personal injuries sustained during a car accident. In order to take this legal action, you hire an attorney. The attorney's agreement is to take your case under a contingency fee of 33 percent of the damages recovered. The debt you owe to your attorney will be considered unliquidated until the lawsuit is resolved because you don't know whether you will win the case or how much the damages will be if you do win. 

Similar to a contingent debt, you must list any unliquidated debts on your financial records, even if you don't know the value of the debt amount. After the debt amount becomes clear and is no longer under dispute, its classification shifts to liquidated. It is possible for both unliquidated and liquidated debt to be discharged as part of a bankruptcy filing. 

How Unliquidated Debt Arises and Common Examples

Unliquidated debt typically arises when a financial obligation exists but the amount owed has not been precisely calculated. This can happen in a variety of legal or contractual scenarios:

  • Personal injury lawsuits: Until a judgment is entered or a settlement is reached, the damages (medical expenses, lost wages, pain and suffering) remain uncertain.
  • Legal contingency fees: If an attorney represents a client on a contingency basis, the fee is unliquidated until the case resolves and the recovery amount is known.
  • Breach of contract claims: When a party sues for breach but hasn't yet proven damages, the debt is unliquidated.
  • Insurance disputes: Claims involving ongoing medical treatment or property damage may result in debts that remain unliquidated until the insurer's obligations are determined.

Courts often require that unliquidated claims be resolved before finalizing judgments or bankruptcy disbursements, as the total amount must be known for equitable distribution.

Contingent Debt

When an individual owes a debt to a creditor based on an event that hasn't taken place yet, this is called "contingent debt." Repayment of a contingent debt may never be required because it could be tied to an event that never occurs. A contingent debt is identified when the debt is probable due to a contingent situation, and the amount can only be estimated but is not finalized. 

When filing bankruptcy, you may wonder why you would need to list a debt in the documents that might not be required. However, a contingency debt is technically an obligation because it could come up in the future. In many bankruptcy cases, contingency obligations can be discharged as part of the proceedings.

One example of a contingency debt is if you were to cosign on a vehicle loan for a family member. You could be liable for the debt if your family member defaults on the loan, which obviously may or may not occur. This would be considered contingency debt that could be discharged during a bankruptcy filing.

Key Differences Between Contingent and Unliquidated Debt

While contingent and unliquidated debts are both uncertain, they differ in nature:

  • Contingent debt depends on a future event that may never happen. If the event does not occur, the obligation to pay may never arise.
  • Unliquidated debt, by contrast, is a present obligation—the debtor knows they owe something, but the exact amount is not fixed.

Example:

  • If you co-sign a loan and the primary borrower defaults, your liability becomes non-contingent at that point.
  • If you are sued for damages, and liability is established but damages are yet to be calculated, the claim is unliquidated.

These distinctions are important when preparing bankruptcy schedules, as each category must be disclosed even if the claim is uncertain or conditional.

Disputed Debt

You can dispute a debt if you and your creditor are not in agreement. The dispute could arise from the:

  • Amount of the debt
  • The overall existence of the debt

For instance, Citibank sends you a notice that your outstanding debt is $3,000, but your records show that the debt is $1,500. The next step would be listing Citibank as your creditor and including the full amount owed and shown as outstanding. You would need to identify that you are disputing the debt.

When you include the amount on your bankruptcy filing documents, it becomes eligible to be discharged. Doing this also alerts the trustee in your bankruptcy case that your creditor possibly shouldn't receive the full amount when distributing your assets.

Listing Debts on Bankruptcy Papers

When completing bankruptcy paperwork, you must include all debts. On the documents, the debts are also called "claims" because your creditor can claim the funds. In many cases, the claim amount is straightforward and won't be disputed. If you are behind on the mortgage loan on your house, you would need to list the amount of total debt owed on the house as the claim amount. If you owe rent to your landlord, include the claim amount as the total due to your landlord. 

Treatment of Unliquidated Claims in Bankruptcy

In bankruptcy, listing unliquidated debts is essential to full disclosure, even if their final value is undetermined. The trustee and creditors must assess all potential claims to ensure a fair distribution of the estate.

Chapter 7 Example:A trustee cannot finalize distributions to creditors until all claims are liquidated. If multiple creditors have unliquidated claims, such as lawsuits or pending judgments, the case may be delayed until those claims are resolved.

Debtor's Perspective:Debtors benefit from listing unliquidated claims because those debts may be eligible for discharge—even if the creditor has not yet determined the amount. If omitted, a creditor might later challenge the dischargeability of the debt on grounds of nondisclosure.

Liquidated vs. Unliquidated Claims

When comparing liquidated and unliquidated claims, it's important to understand the agreement made by the parties involved in a bankruptcy proceeding. One agreement in bankruptcy is called an "accord" and allows the involved parties to discharge one obligation by accepting another consideration as a substitute. The execution of this agreement is referred to as "satisfaction."

Frequently Asked Questions

  1. What is an example of unliquidated debt?
    A personal injury lawsuit where the damages are still being determined is a classic example of unliquidated debt.
  2. Do I have to list unliquidated debts in bankruptcy?
    Yes, even if the amount is unknown, you must disclose unliquidated debts in your bankruptcy filing.
  3. Can unliquidated debts be discharged in bankruptcy?
    Yes, if properly listed and meeting discharge criteria, unliquidated debts can be discharged just like liquidated ones.
  4. How is unliquidated debt different from contingent debt?
    Unliquidated debt is owed but the amount is unknown; contingent debt may never be owed unless a future event occurs.
  5. Why does the trustee need liquidated amounts to distribute funds?
    The trustee must know exact amounts owed to ensure fair and proportional payment to all creditors.

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