What is Bankruptcy? What are secured and unsecured loans?

Very simply put bankruptcy is when you cannot pay back your debts in any way.

It can happen to companies and individuals.

When bankruptcy is announced, someone, usually a government agency, takes charge of all affairs of the company. A list of debtors (people who have to get money from the bankrupt entity) is drawn up and they are paid back using a system.

What are secured assets?

Suppose Company A takes a loan from Bank B. Company A pledges its factory building as security for the loan.

This is a secured loan.

If Company A goes bankrupt, Bank B has the first right to their secured asset – the factory building. Any proceeds coming from the sale of the factory building are first used to pay Bank B.

What are unsecured loans or assets?

Suppose Company A takes a cash loan from Bank C. Since the loan is for a short period and at high interest rate, Bank C and Company A do not need a security for the loan. However, before Company A can pay back the cash loan, it goes bankrupt.

Now, Bank C has no asset as a security for its loan. So, its cash loan is an unsecured asset.

During bankruptcy, the money given to secured creditors and unsecured creditors makes a huge difference to how much money they will get.