Secured and Unsecured Creditors

An unsecured creditor is one who has no lien on collateral for the debt such as a mortgage on a house or a recorded promissory note and lien on the title of a vehicle. A judgment creditor is one who filed and won a lawsuit proving the debtor owes the creditor money and the judge has signed a judgment declaring it so. Execution is the process by which a judgment creditor seeks to collect on its judgment, typically a lawsuit to garnish wages, attach money in a bank account, or take assets such as vehicles to auction off to pay the (often unrelated) debt.

When a debtor has multiple unsecured judgment creditors, the one who executes first has priority, i.e. gets the assets of the debtor, even if it was not the first to record. Compare to a secured creditor:

A secured creditor is one who extended credit to the debtor, BUT took a lien on collateral for the credit extended. Example: Debtor buys a house and gets a mortgage loan giving a lien on the house as collateral. This secured creditor has and keeps first priority for payment by the debtor, even if this creditor does not get a judgment for non payment of debt nor execute first on a judgment it does get. I.e. If debtor takes out a second loan on the house and gives that creditor a lien, the second creditor cannot take the house until the first lienholder is paid in full, which the second lienholder can choose to pay, and might if it is profitable to do so.

The first lienholder on collateral enjoys priority by virtue of its lien. This is what makes the creditor "secured".

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