Debts can be classified broadly into two types based on certainty. One would be liquidated debt and the other could be contingent or unliquidated debt. Liquidated debt in simple terms has a contractual agreement or a loan agreement, or a document describing the kind of liability, the amount of liability, and the tenure. Basically, this debt can be easily converted into a dollar amount. There is a certainty and the dollar amount of the debt once liquidated does not depend on any future event.
The other kind of debt is unliquidated or contingent debt. This is more commonly seen in the case of businesses, where they have been sued and the lawsuit could cost nothing, a few thousand dollars or even a million dollars. There are some situations where an individual can also be a form of such an agreement or be exposed to contingent debt. It is more often seen in car crash cases or in the case of a domestic cases whose judgment is being awaited.
How does it impact bankruptcy?
An unliquidated debt creates uncertainty, and it is difficult for the bankruptcy court to proceed with a judgment or come to an agreement with a contingent debt liability. As a bankruptcy filer, it would be extremely helpful if there are no unliquidated debts while filing for bankruptcy. However, it is not the case every time, more so in the case of businesses as they are bound to have some of the other lawsuits running. Individuals with lawsuits also need to be careful as the courts need to have some sort of dollar liability for the contingent debts as well to arrive at a judgment.
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