The word contingent refers to “likely” or “possibly”, therefore a contingent creditor would seem to be defined as a creditor with “a creditor event or condition that is likely but not inevitable.” But in the credit field, a person is a company’s creditor if money is owed to that person.
This person has provided some sort of services or goods to that company, or even made financial loans to the company. In fact, someone who works for a company, owed money for unpaid wages and so on, is considered a creditor.
But a contingent creditor is one who may be owed a certain amount of money, if certain events are to occur—such as successfully laying a legal claim against the said company. There are several types of creditors: related, secured, and contingent creditor. To help define the term “contingent creditor,” looking at a contingent asset may help as it would have an opposite meaning.
An asset that is contingent is an asset that is potential, associated with a possible or likely gain. This is different from a contingent liability or contingent loss, as the assets and gain that are contingent are not recorded in the company’s accounts. In other words, a contingent liability is a potential liability—and a contingent creditor is a potential debt collector.
One example used to explain it better was the purchase of a card for a grandchild. Obviously, the car is guaranteed to be paid by the grandparents, signing on the grandchild’s first loan as co-signers. If the grandchild pays the loan off on time or even earlier, there will be no liability toward the grandparents. But if the grandchild fails to make the payments, the grandparents will have a liability against them.
A contingent creditor is claimed if the company finds the grandparents guilty of non-payment, instead of the grandchild as the loan papers were signed by the grandparents, not the grandchild.
The term contingent creditor refers to a case or situation that may happen, but yet is not finalized in court. Many cases have such situations, such as individual death, loans, banks, loan companies, and so on. A contingent creditor refers to a bank or company who files a lawsuit against a particular company which has a contingent liability or loss contingency.
A liability and loss against the company is filed only if the company is found legally guilty of non-payment. If the company is found non-guilty for whatever reason, the contingent liability is not considered an actual liability or loss. Therefore, until a company goes to court, the term contingent creditor plays a big factor on what is owed or needs to be paid by the company in debt.