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I was reading up about commercial paper on investopedia. It says that commercial paper is a form of short-term unsecured debt. It then goes on to say that

Commercial paper is not usually backed by any form of collateral, making it a form of unsecured debt.

In the accompanying video...

Buyers have no claim on a company's assets if the company fails to pay up at maturity. Therefore only firms with good credit can successfully sell commercial paper.

Is this to say that a company could sell $10M worth of commercial paper, and refuse to pay it back with no consequence other than a dismal credit rating?

Read more: Commercial Paper http://www.investopedia.com/terms/c/commercialpaper.asp#ixzz4x6yFnpYx

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It'd be more accurate to say that you have no priority claim on the assets of the company.

With a secured loan, you have security over the collateral and if the company failed to repay the loan you could seize the collateral and sell it to get your proceeds.

With an unsecured loan, the company still owes the money and if they're still solvent you can take them to court to get it back. If they fail to pay up because they've gone bankrupt, then you would have a claim against the "estate", i.e. any general remaining assets of the company after secured loans and higher priority creditors have been repaid. So probably in that circumstance you'll only get a part of your loan back (perhaps nothing).

But a company that does have the money to repay you absolutely has to do it. In the end if they refused a court and the subsequent collections process would force them to, by seizing their assets if necessary.

  • There's really nothing special beyond any other loan or contract. If you loan me $1000, and I don't pay you back as agreed, you need to go to court to enforce that we had an agreement and get a court order for me to pay you. But if I don't have the money to pay my debts, then courts have a system we call bankruptcy to determine a "fair" way to distribute any assets I do have. People often only talk about the case where somebody can't pay their creditors, since the case where they have the money but just don't want to pay it back would be odd since a court would just make them do so. – user42405 Nov 1 '17 at 14:39
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with no consequence other than a dismal credit rating?

  1. I'd say that's a pretty severe consequence, given that at some point in the future they'll need to borrow money again, and no one will lend it to them.
  2. Part of the contract is a legal promise to pay it back. It's fraud (a criminal offense) to sign a contract with the foreknowledge that you plan on breaking it.
  • 1. I didn't mean to imply dismal credit isn't a severe consequence, but I see your point in highlighting the severity. 2. Does that mean if there is no proof that borrower planned on refusing to pay, then the lender has no claim on the assets? – timwiz Nov 1 '17 at 0:10
  • @colorlace if the company is still in business and not filed for bankruptcy then the entity holding the paper can sue the debtor. And if there's any inkling of fraudulent intent then the plaintiff's attorneys can petition the judge for discovery. – RonJohn Nov 1 '17 at 0:41
  • It seems to me, from what you and others have said, that if the borrower refuses to pay back the lender, then the lender can take them to court and force them to pay it back. If the borrower still refuses, will they be jailed or will money be forcibly removed from there account somehow? I guess it is a bit of an odd scenario, but I find myself wondering "what then?" after each seeming resolution. – timwiz Nov 1 '17 at 22:33
  • @colorlace this is a civil crime, so no jail. You could probably get a court order to seize assets. Since none of this is anywhere near related to personal finance, you really need to ask law.SE. – RonJohn Nov 1 '17 at 23:20
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Yes, in the same sense that it's totally legal to refuse to pay your credit card.

But if you do so, you can expect that nobody else will loan you money, and for the debt holder to take you to court to try to force you to pay.

But you won't face criminal charges for it unless you engaged in some pretty blatant fraud.

  • 1
    There is a lot of space between "totally legal" and "facing criminal charges". – mastov Dec 5 '17 at 19:15

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