What Is Liquidated Debt?

Definition and Example of Liquidated Debt

Any debt with a specific and clearly stated amount due is a liquidated debt. Sometimes this is clear from the start, but you may have to work with a creditor and possibly the court to arrive at an agreed-upon amount under some circumstances.

It’s not hard to figure out what you owe for many debts. Your creditor makes it easy by sending you a statement, usually monthly. The statement will set out your charges, the interest that's accrued, any fees you’ve incurred, payments you made during the billing cycle, and your balance.

In other cases, the amount of your debt isn't 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've made.

A debt is contingent if some event must occur before the debtor becomes liable for paying it. One common example is a guarantor who agrees to pay the debt, but only if the primary borrower defaults. The primary borrower doesn’t pay, or otherwise fails to meet the terms of the agreement.

Debt can arise from many sources, such as court judgments.

How Liquidated Debt Works

Debt disputes might arise when a creditor seeks to collect a debt from you, or if you have to file for bankruptcy. Your creditors may submit different debt claims to your bankruptcy trustee than what you provided. Any of those debts are said to be unliquidated in that case.

Contingent debts would also be considered unliquidated. The amounts can't be settled until the event upon which it's contingent occurs.

You or your bankruptcy trustee would have to seek proof of these 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 owed, this amount can't be determined until all debts are liquidated.

Liquidated Debt vs. Unliquidated Debt

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're contingent on an event, such as a court case settlement. Unliquidated debt becomes liquidated when the final amount owed is determined, whether by agreement between the parties or by court order.

Liquidated Tort Debt

Suppose you were to rear-end the car in front of you during rush hour one afternoon. The driver you hit has to go to the hospital. The accident costs the driver $4,379 after treatment and getting an estimate on fixing their car. They know how much the event cost them, because they have the bills and an estimate to prove it. The $4,379 is a liquidated debt unless you have some reason to dispute the amount.

Now suppose that the driver suffered an injury that will require treatment for an extended period of time. The amount of the debt is unliquidated until that treatment is completed. But you can come to an agreement to pay a certain sum to the driver if you're found liable for the accident. You can be released from any future responsibility for payments. The debt is then liquidated, because the parties have come to an agreement.

But maybe you dispute either how much you owe or whether you’re at fault for the accident. The injured driver may take you to court. The judge or jury may find that you caused the driver’s injuries, thus ruling that you owe the driver $50,000. The court could enter a judgment for a "sum certain." The debt you owe will have become liquidated.

Liquidated Contractual Debt

Unliquidated debts aren’t limited to accident situations. They can occur when a contract is involved. Suppose you were to borrow 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 suppose you come into a little money, and you decide to use it to pay off the loan early. You end up paying a total of $9,500. That, too, is a liquidated amount. It’s easily calculated. You and the lender both agree that’s what you owe.

Now consider what would happen if you were to lose your job and become unable to make the payments anymore. The lender could repossess your car and put it up for sale. You’d be liable for the difference that remains if the lender couldn’t get enough from the sale to pay off your entire debt. The debt would be unliquidated until the car were sold. 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 would bring in enough to pay the loan in full. Either way, the debt couldn't be liquidated until the car were sold.