What Is Liquidated Debt?

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Debt is the concept of an item or monetary value owed by one entity to another. Someone who takes out a home loan is in debt to the bank that lent her the money. A company that hires a consultant to perform work for it is in debt to him. The types of debt most people are familiar with include credit cards, mortgages and car loans.

Liquidated

  • The financial term "liquidated" is most commonly used in dealing with liquidated assets, which refers to real property, stocks or an item of value that is converted into cash. A simple example: If a person owns stock and needs money, she can sell the stock to a trader for a set price, ending her ownership of the stock, and acquiring money.

Actual Dollar Value

  • Liquidated debt can be thought of as similar to liquidated assets. Debt can at first be "unliquidated," meaning an actual dollar value is not known. Because of a court decision or an agreement between the lender and debtor, the debt becomes liquidated, meaning the amount of debt becomes clear and undisputed. Most commonly, this means it is given a dollar amount.

    The second meaning of liquidated debt means that the liability is settled or paid up.

Unliquidated and Liquidated Example

  • A person can own stock in a certain information-technology company with an undeclared value (unliquidated). If he goes to a trader and says he will sell it for $100 and the trader agrees, the value of the stock has become liquidated.

Liquidated As Resolved

  • A statement that a debt is liquidated debt can either mean that a value is assigned to the debt, or that the debt is ended. A person would need to look further at the context or ask for clarification as to the meaning.

How Unliquidated Debt Becomes Liquidated

  • A clear example of the first understanding of liquidated debt would be if a person slips and is injured in a store. If she can prove that the store owner was negligible, a judge might find the store owner guilty and liable for damages. At this point, the store owner has unliquidated debt to the injured party.

    Once the judge views the injured party's medical bills and any expenses related to the injury, the judge might declare that the store owner owes the plaintiff $30,000. Now the debt is liquidated (clarified). Once the $30,000 is paid, we can say that the debt is liquidated according to the second definition (paid up).

References

  • Photo Credit One Dollar - variations of Crumpled dollar image by PaulPaladin from Fotolia.com
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