Financial Glossary – Debt Relief Terms & Definitions

When you are overwhelmed managing debt, the terminology can be overwhelming. Utilize our extensive financial glossary to find the definition you’re seeking.

 

  • 1099-c Cancellation of Debt: A tax form issued by a creditor when a settlement yields savings of $600.00 or higher.

 

  • Balance Transfer: A balance transfer is moving a debt balance from one account to another account. The most common type of balance transfer is shifting debt from one credit card to another credit card. Most often, people transfer a balance in order to take advantage of a lower interest rate.

 

  • Bank Levy: A court judgment for bank levy allows a bank to freeze the account(s) of a debtor until all the sought-after debt is repaid in full. If the levy is not lifted, the creditor can take the funds from the bank account and apply them to the total debt owed.

 

  • Business Debt: A credit card or loan can be taken out under the name of a business. Some business debt, like through banks like Chase, Capital One, AMX, etc., are similar to regular credit cards. Lenders that specifically lend only to businesses, however, are likely more aggressive in their collection tactics. Laws regarding collection differ from personal to business debt, and lenders that specifically lend to business are often the most aggressive.

 

  • Chapter 13 Bankruptcy: A chapter 13 bankruptcy is also called a wage earner’s plan. It enables individuals with regular income to develop a plan to repay all or part of their debts. Under this chapter, debtors propose a repayment plan to make installments to creditors over three to five years. If the debtor’s current monthly income is less than the applicable state median, the plan will be for three years unless the court approves a longer period “for cause.” (1) If the debtor’s current monthly income is greater than the applicable state median, the plan generally must be for five years. In no case may a plan provide for payments over a period longer than five years. During this time the law forbids creditors from starting or continuing collection efforts.

 

  • Chapter 7 Bankruptcy: Chapter 7 bankruptcy, also known as a straight or liquidation bankruptcy, is a type of bankruptcy that can clear away many types of unsecured debts. If you’re far behind on your bills and don’t have the means to afford monthly payments and living expenses, filing Chapter 7 bankruptcy could be a last resort to help you reset your finances. However, you may have to give up some of your possessions, and it will have a long-lasting negative impact on your creditworthiness.

 

  • Charge Card: is a type of credit cardthat enables the cardholder to make purchases which are paid for by the card issuer. The cardholder is obligated to repay the debt to the card issuer in full by the due date, usually on a monthly basis, or be subject to late fees and restrictions on further card use. Charge cards are typically issued without spending limits, but regular credit cards usually have a specified credit limit that the cardholder may not exceed. Most charge cards are business and corporate charge cards, not personal charge cards. Charge cards are issued to customers with good or excellent credit score.

 

  • Charge Off: A charge-off is a debt, for example on a credit card, that is deemed unlikely to be collected by the creditor because the borrower has become substantially delinquent after a period of time. However, a charge-off does not mean a write-off of the debt entirely. Having a charge-off can mean serious repercussions on your credit history and future borrowing

  

  • Civil Judgement: A civil judgment is a ruling against a defendant in a court of law. It refers to a non-criminal legal matter and often requires the defendant to pay damages. Damages are generally money amounts.

 

  • Collateral: Is something pledged as security for repayment of a loan, to be forfeited in the event of a default.

 

  • Collection Agency: A collection agency is a company used by lenders or creditors to recover funds that are past due, or from accounts that are in default. Often, a creditor will hire a collection agency after it has made multiple failed attempts to collect its receivables. A lender may outsource the debt-collection activity to a third party (the collection agency), or it may have an internal department or a debt-collection subsidiary that would handle the job.

 

  • Collection Attorney: Similar to a collection agency, but with attorneys on staff. In addition to what a collection agency can do, a collection attorney can summons a customer to court. If the customer does not resolve the summons, a judgment may be awarded, potentially leading to a wage garnishment, bank levy, or lien on a property.

  

  • Credit Bureaus: TransUnion, Equifax, Experian:  there are three major credit reporting bureaus: Equifax, Experian, and TransUnion. Each of these reporting companies collects information about consumers’ personal financial details and their bill-paying habits to create a unique credit report; although most of the information is similar, there are often small differences between the three reports

 

  • Credit Cards: is a payment cardissued to users (cardholders) to enable the cardholder to pay a merchant for goods and services based on the cardholder’s accrued debt (i.e., promise to the card issuer to pay them for the amounts plus the other agreed charges). The card issuer (usually a bank) creates a revolving account and grants a line of credit to the cardholder, from which the cardholder can borrow money for payment to a merchant or as a cash advance.

 

  • Credit Counseling/Debt Management Plan: Credit counseling provides consumers with guidance on consumer credit, money management, debt management, and budgeting. Many counseling services will negotiate with creditors on the borrower’s behalf to reduce credit card and loan interest rates and waive late fees.

 

  • Credit Inquiry: A credit inquiry is a credit check. Inquiries happen when there is a legally permitted request to see your credit report from a company or person.

  

  • Credit Limit: The term credit limit refers to the maximum amount of credit a financial institution extends to a client. A lending institution extends a credit limit on a credit card or a line of credit. Lenders usually set credit limits based on the information given by the credit-seeking applicant. A credit limit is a factor that affects consumers’ credit scoresand can impact their ability to obtain credit in the future.

 

  • Credit Pull (Hard Pull vs Soft Pull): Hard inquiriesare ones made with your permission for specific transactions. When you apply for credit—be it a credit card, mortgage or car loan—the potential lender will generally pull your credit before deciding whether to approve your loan application and what the terms might be. Soft inquiries won’t show up on reports requested to evaluate your creditworthiness. Every time you check your credit report, a soft inquiry is generated. Among other reasons, soft inquiries happen when creditors check your credit to determine any pre-approved offers.

 

  • Credit Report: A credit report is a detailed breakdown of an individual’s credit history prepared by a credit bureau. Credit bureaus collect financial information about individuals and create credit reports based on that information, and lenders use the reports along with other details to determine loan applicants’ creditworthiness.

 

  • Credit Score: A credit score is a number between 300–850 that depicts a consumer’s creditworthiness. The higher the score, the better a borrower looks to potential lenders. A credit score is based on credit history: number of open accounts, total levels of debt, and repayment history, and other factors. Lenders use credit scores to evaluate the probability that an individual will repay loans in a timely manner.

 

  • Cross Collateralization: Cross collateralization involves using an asset that’s already collateral for one loan as collateral for a second loan. The loans can be of the same type, a second mortgage is considered cross collateralization, but cross collateralization also includes using an asset, such as a vehicle, to secure another sort of financing, such as a credit card. Cross collateralization clauses can easily be overlooked, leaving people unaware of the multiple ways they might lose their property.

 

  • Debt Buyer: A debt buyer is a company that purchases debt from creditors at a discount. Debt buyers, such as collection agencies or a private debt collector, buy delinquent or charged-off debt at a fraction of the debt’s face value. The debt buyer then collects on the debt either on its own or through the hiring or a collection agency or resells portions of the debt, or any combination of these alternatives

 

  • Debt Lawsuit: A debt collection lawsuit begins when a creditor files a complaint with a state civil court listing you as a defendant, along with your co-signer if you have one. The complaint will say why the creditor is suing you and what it wants. With a default judgment the creditor may be able to: Garnish wages, bank levy, or lien on a property.

 

  • Debt Settlement aka Debt Resolution, Debt Negotiation: Debt settlement is a settlement negotiated with a debtor’s unsecured creditor. Commonly, creditors agree to forgive a large part of the debt: perhaps around half, though results can vary widely. When settlements are finalized, the terms are put in writing.

  

  • Debt to Income Ratio: The debt-to-income (DTI) ratio is the percentage of your gross monthly income that goes to paying your monthly debt payments and is used by lenders to determine your borrowing risk.

 

  • Debt Utilization: The credit utilization ratio is the percentage of a borrower’s total available credit that is currently being utilized. The credit utilization ratio is a component used by credit reporting agencies in calculating a borrower’s credit score.

 

  • Default: Default is the failure to repay a debt, including interest or principal on a loan or security. A default can occur when a borrower is unable to make timely payments, misses payments, or avoids or stops making payments. Individuals, businesses, and even countries can default if they cannot keep up their debt obligations. Default risksare often calculated well in advance by creditors

  

  • Deficiency Balance: A deficiency balance is the net difference between the amount a borrower owes on a secured loan and the amount the creditor receives after selling the collateralthat secures the loan. Typical examples of when a deficiency balance might occur include after a lender repossesses a car because the borrower has failed to make payments, or takes possession of a home in a foreclosure

 

  • Fair Debt Collection Practices Act (FDCPA): The Fair Debt Collection Practices Act (FDCPA) is a federal law that limits the actions of third-party debt collectors who are attempting to collect debts on behalf of another person or entity. The law restricts the ways that collectors can contact debtors, as well as the time of day and number of times that contact can be made. If the FDCPA is violated, the debtor can sue the debt collection company as well as the individual debt collector for damages and attorney fees.

  

  • FICO: A FICO score is a credit scorecreated by the Fair Isaac Corporation (FICO). Lenders use borrowers’ FICO scores along with other details on borrowers’ credit reports to assess credit risk and determine whether to extend credit. FICO scores take into account data in five areas to determine creditworthiness: payment history, current level of indebtedness, types of credit used, length of credit history, and new credit accounts

 

  • Foreclosure: Foreclosure is a legal process in which a lender attempts to recover the balance of a loan from a borrower who has stopped making payments to the lender by forcing the sale of the asset used as the collateral for the loan

 

  • Home Equity Line of Credit: Use the equity in your home—that is, the difference between your home’s value and your mortgage balance—as collateral. As the loans are secured against the equity value of your home, home equity loans offer extremely competitive interest rates—usually close to those of first mortgages. Compared with unsecured borrowing sources, such as credit cards, you’ll be paying less in financing fees for the same loan amount

 

  • IRS FORM 982: A tax form used to qualify for insolvency exception with the Federal Government. If qualified, you will be deemed either totally or partially insolvent and can be exempt from being taxed on the debt amount forgiven.

 

  • Lien: A lien is a claim or legal right against assets that are typically used as collateral to satisfy a debt. A lien could be established by a creditor or a legal judgement. A lien serves to guarantee an underlying obligation, such as the repayment of a loan. If the underlying obligation is not satisfied, the creditor may be able to seize the asset that is the subject of the lien.

 

  • Line Of Credit: A line of credit (LOC) is a preset borrowing limit that can be tapped into at any time. The borrower can take money out as needed until the limit is reached, and as money is repaid, it can be borrowed again in the case of an open line of credit. A LOC is an arrangement between a financial institution—usually a bank—and a client that establishes the maximum loan amount the customer can borrow. The borrower can access funds from the line of credit at any time as long as they do not exceed the maximum amount (or credit limit) set in the agreement.

  

  • Medical Debt: Medical debt refers to debt incurred by individuals due to health care costs and related expenses. Medical debt is different from other forms of debt, because it is usually incurred accidentally or faultlessly

 

  • Military Debt:

 

  • Mortgage: A mortgage is a debt issued to purchase real estate, such as a house or condo. It is a form of secured debt as the subject real estate is used as collateral against the loan.

 

  • PayDay Loan: A payday loan is a short-term unsecured loan, often characterized by high interest rates. The term “payday” in payday loan refers to when a borrower writes a postdated check to the lender for the payday salary, but receives part of that payday sum in immediate cash from the lender

 

  • Personal Loans: A personal loan is an amount of money you can borrow to use for a variety of purposes. For instance, you may use a personal loan to consolidate debt, pay for home renovations, or plan a dream wedding. Personal loans can be offered by banks, credit unions, or online lenders. The money you borrow must be repaid over time, typically with interest. Some lenders may also charge fees for personal loans.

 

  • Prime Borrower: A prime borrower is someone who is considered a below-average credit risk. This type of borrower is considered likely to make loan payments on time and likely to repay the loan in full. Prime borrowers have credit files that show a strong history of using credit wisely and handling loans responsibly. As a result, their credit scores tend to fall on the higher end of the spectrum.

  

  • Repossession: Repossession is the term used to describe the taking back of property after a borrower has defaulted on payments. The lender either repossesses the collateral or pays a third-party service to do so.

 

  • Revolving Debt: Revolving debt is a line of credit or an amount that a borrower can continuously borrow from. In other words, the borrower may use funds up to a certain amount, pay it back, and borrow up to that amount again. The most common form of revolving debt is credit card debt. The card issuer initiates the agreement by offering a line of credit to the borrower. As long as the borrower fulfills their obligations, the line of credit is available for as long as the account is active.

 

  • Retirement Accounts (401k, IRA)
    • IRA: An individual retirement account (IRA) is a tax-deferred investment account that helps you save for retirement. There are four popular types of IRAs — traditional, Roth, SEP and SIMPLE — and all offer tax benefits that reward you for saving. You can open an IRA at banks, robo-advisors and brokers, and your contributions may be tax-deductible, or withdrawals may be tax-free.
    • 401k: A 401(k) is a retirement savings and investing plan that employers offer. A 401(k) plan gives employees a tax break on money they contribute. Contributions are automatically withdrawn from employee paychecks and invested in funds of the employee’s choosing (from a list of available offerings).

 

  • Secured Debt: Secured debt is collateralized debt. Debtors usually require the collateral to be property or assets with a large enough value to cover the amount of the debt. Examples of collateral include vehicles, houses, boats, securities, and investments. These items are pledged as security and the agreement is created with a lien. Upon default, the collateral may be sold or liquidated, with the proceeds used to repay the loan.

 

  • Statute of Limitations: A statute of limitations is a law that sets the maximum amount of time that parties involved in a dispute have to initiate legal proceedings from the date of an alleged offense, whether civil or criminal. However, the length of time the statute allows for a victim to bring legal action against the suspected wrong doer can vary from one jurisdiction to another and the nature of the offense.

 

  • Student Loan (Private vs Federal) :
    • Federal student loans: These are made by the government, with terms and conditions that are set by law, and include many benefits (such as fixed interest ratesand income-driven repayment plans) not typically offered with private loans.
    • Private Student Loans: In contrast, private loans are made by private organizations such banks, credit unions, and state-based or state-affiliated organizations, and have terms and conditions that are set by the lender. Private student loans are generally more expensive than federal student loans.

 

  • Sub-Prime Borrower: A subprime borrower is a person considered to be a relatively high credit riskfor a lender. Subprime borrowers have lower credit scores and are likely to have multiple negative factors in their credit reports, such as delinquencies and account rejections. Subprime borrowers may also have a “thin” credit history, meaning they have little or no activity in their credit reports on which lenders can base their decisions.

 

  • Tax Debt: Tax liability is the payment owed by an individual, a business, or other entity to a federal, state, or local tax authority.

 

 

  • Tribal Loan: Tribal loans come from lenders owned by Native American tribes on tribal land. Tribal loans are often advertised as an alternative to payday loans for people who need emergency cash. Many tribal lenders accept online applications for short-term small-dollar loans. Some tribal lenders have claimed sovereign immunity from state or federal lending laws.

 

  • Unsecured Debt: Unsecured debt is debt that does not require collateral as security. The creditworthiness and the debtor’s ability to repay are reviewed before consideration is given. Since no collateral assignment is issued, the debtor’s credit profile is the primary factor used in determining whether to approve or deny lending. Examples of unsecured debt include unsecured credit cards

 

  • Wage Garnishment: Garnishment, or wage garnishment, is when money is legally withheld from your paycheck and sent to another party. It refers to a legal process that instructs a third party to deduct payments directly from a debtor’s wage or bank account. Typically, the third party is the debtor’s employer and is known as the garnishee. Federal law prohibits employers from firing a worker to avoid processing a garnishment payment. Garnishments are used for debts such as unpaid taxes, monetary fines, child support payments, and defaulted student loans.