Creation of debt

     We commonly think of debt as being created by an agreement between two or more individuals or legal entities (such as a corporation or partnership). Some debt is created as a result of a loan of money, such as a loan by a relative, friend, or bank. We would typically refer to the person making the loan as the lender and the person obligated to repay the loan as the borrower. Debt is also created as a result of the acquisition of goods, intangible property, real property, services, or a right to use property, the price of which is to be paid for in the future.

     Agreements creating debt take many forms, ranging from an informal oral agreement, sometimes cemented by a handshake, to a set of long, detailed and carefully drafted written agreements. When debt is created by agreement, i.e. when it is consensual, it is typically referred to as credit, deriving from the Latin creditum, meaning something entrusted to another. The lender of money, or the seller of property or services to be paid for in the future, may thus be referred to as the creditor and the person to whom the loan or sale is made may be referred to as the debtor.

     Debt also derives from acts other than agreements, such as the commission of a tort, violation of the antitrust laws, or contamination of land with toxic waste, for which the law (common law, statute or regulation) requires money compensation.  One party may deny liability, in which case the claim is disputed until resolved; alternatively, or in addition, the parties may disagree on the amount, if any, that is owing, in which case the claim will be unliquidated until the disagreement is resolved. Once liability is established, we have debt (i.e.liability on a claim) and once the amount of liability is established we have liquidated debt.

     Unsecured debt is debt for which the creditor has no collateral, i.e. the creditor has no interest in any property of the debtor that it may collect or liquidate to satisfy the debt.  In attempting to collect a debt which a debtor is unable or unwilling to pay, an unsecured creditor may attempt to become secured, i.e. gain an interest in property of the debtor, i.e. obtain a lien, through agreement of the debtor or, absent such agreement, through use of enforcement of judgment procedures of the judicial process that we describe more fully in Commentary.Enforcement of Judgment.