In loan transactions or credit contracts, collateral is an important factor that helps creditors minimize risk when the borrower fails to fulfill repayment obligations. However, creditors do not always require collateral for a debt.

So, when a creditor does not have collateral, how does the law protect the rights and interests of the parties involved? In the following article, NPLAW provides main legal regulations on unsecured creditors.

I. Understanding of unsecured creditors

1. What is an unsecured creditor?

Pursuant to Clause 4, Article 4 of the Bankruptcy Law 2014, an unsecured creditor is an individual, agency, or organization with the right to require a business or cooperative to fulfill its debt obligations that are not secured by the assets of the business, cooperative, or a third party.

2. Characteristics of unsecured creditors

Some major characteristics include:

  • No collateral: An unsecured creditor arises when the lender or credit institution does not request or receive collateral from the borrower. It may occur when the borrower lacks valuable assets or when the parties agree that collateral is not required.
  • Higher risk for the creditor: Without collateral, the creditor faces greater risks if the borrower fails to execute payment obligations. Recovery depends on legal measures rather than seizing collateral.
  • Dependence on legal remedies: Creditors must rely on other legal measures to recover debts, including intervention of Court or negotiation with the borrower.
  • Difficulty in debt recovery: If the borrower is unable to pay, recovery is more challenging due to the absence of collateral. Creditors must depend on the borrower’s cooperation or seek assistance from the Court or enforcement authorities.

3. Types of unsecured creditors

According to Clause 4, Article 2 of the Bankruptcy Law 2014, unsecured creditors include:

  • Individuals
  • Agencies
  • Organizations

These entities have the right to require businesses or cooperatives to fulfill debt obligations not secured by the assets of the business, cooperative, or a third party.

II. Legal provisions on unsecured creditors

1. Difference between unsecured and secured creditors

Clause 5, Article 2 of the Bankruptcy Law 2014 defines secured creditors as individuals, agencies, or organizations with the right to require a business or cooperative to fulfill debt obligations secured by the assets of the business, cooperative, or a third party.

Accordingly, secured creditors can recover debts using collateral, reducing their risk. Secured debts generally have lower interest rates.

In contrast, repayment to unsecured creditors depends on bankruptcy proceedings or Court judgments. Unsecured creditors must file lawsuits and obtain Court orders to recover debts through wage garnishment or other assets.

2. Legal basis for unsecured borrowing

According to Article 463 of the Civil Code 2015, a loan contract is an agreement where the lender transfers assets to the borrower, who must return assets of the same kind, quantity, and quality when due, and pay interest only if agreed or required by law. Therefore, loans may be granted without collateral by mutual agreement.

The ability to borrow without collateral depends on:

  • Creditworthiness: Higher credit scores and a good repayment history.
  • Income and repayment ability: Stable and sufficient income ensures the borrower can repay principal and interest.
  • Employment history and job stability: A stable work history is considered positively.
  • Policies of the lending institution: Different institutions may prioritize credit score, income, or employment stability.

III. Questions on unsecured creditors

1. Can unsecured creditors file for bankruptcy proceedings?

Clause 1, Article 5 of the Bankruptcy Law 2014 states: Unsecured creditors and partially secured creditors have the right to file for bankruptcy proceedings if, after three months from the due date, the business or cooperative fails to fulfill its payment obligations.

Thus, unsecured creditors can request the opening of bankruptcy proceedings.

2. Do unsecured creditors have priority in debt repayment?

According to Article 54 of the Bankruptcy Law 2014, the order of asset distribution is:

  • Bankruptcy costs;
  • Employee wages, severance, social and health insurance, and other contractual benefits;
  • Debts arising after bankruptcy for business recovery purposes;
  • Financial obligations to the State; unsecured creditors; secured debts not fully satisfied due to insufficient collateral. 

Unsecured creditors are included in the prescribed order, but do not have priority; repayment shall follow statutory order.

3. Can unsecured creditors be organizations?

According to Clause 4, Article 4 of the Bankruptcy Law 2014, an unsecured creditor is an individual, agency, or organization that has the right to request a business or cooperative to perform the obligation to pay a debt that is not secured by the assets of the business, cooperative or a third party.

Thus, an unsecured creditor includes an organization.

4. When can unsecured creditors request bankruptcy proceedings?

Clause 1, Article 5 of the Bankruptcy Law 2014 specifies: Unsecured creditors and partially secured creditors may request bankruptcy proceedings if three months have passed since the debt became due and the business or cooperative fails to pay.

IV. Legal advisory services on unsecured creditors

The above information is provided by NPLaw to assist clients regarding unsecured creditors. For any further inquiries or other legal issues, please contact NPLaw for direct consultation and guidance.