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Common Debt Related Terms

June 1, 2019

At MCC, we focus on IRS tax resolution. We help our clients resolve their IRS tax debt using one of a variety of different avenues. This means we assist with settlements, installments, and other resolution options. Because we focus our practice on tax debt resolution, it makes sense for us to devote many of our blog posts on debt related topics. In this post, we’d like to continue in this manner by discussing a number of debt related concepts. These concepts frequently show up in debt resolution contexts. Let’s take a few minutes and go over some of the more common terms in detail. 

Discretionary Income 

Discretionary income refers to that portion of a person’s income remaining after paying taxes and essential items like food, shelter and clothing. It is an important concept in debt resolution because it can affect a person’s settlement terms. Essential items include things such as food, housing and clothing. Funds for non-essential items count toward a person’s discretionary income. Non-essential items are things like luxury goods, vacations and other things aren’t necessary for basic living.

Default 

Default refers to the status of a loan which has not been paid for a specified period of time. After a loan receives a default status code, it’s common to forward the debt to a third-party collector for collection action. For federal student loans, if no payment is made for 270 days, the loan is considered to be in default. It’s also common for creditors to seek a judgment against a debtor in cases of default. This allows the creditor to satisfy the debt by forcibly taking assets from the debtor.

Amortization 

Amortization has two distinct meanings. In accounting, amortization refers to the gradual writing off of the value of an intangible asset over a period of time. In this way, it is a concept parallel to depreciation (though depreciation applies to tangible assets). With respect to lending, however, amortization refers to a fixed repayment schedule which includes payment on both principal and interest. 

Grace Period

In the context of federal student loan repayment, a grace period refers to the period of time between college completion and the beginning of the repayment process. After college, student loan debtors typically have a short period (usually six months) before they must start the repayment process. This is the grace period. In other contexts, a grace period may simply refer to a period during which a debtor isn’t obligated to make a payment on a given debt. 

Liquidation 

In the context of debt resolution, liquidation refers to the conversion of assets into cash for the purpose of satisfying debts. This may occur following a court judgment. A debtor may be required to take his or her assets (i.e. real estate, stocks, bonds, etc.) and convert them to cash. Then, the debtor must use whatever cash results from the conversion to repay creditors. Liquidation is distinct from garnishment, which refers to a taking of a person’s assets directly before any conversion occurs.

Paid in Full 

This refers to the status of a loan after it has been completely paid off. This status does not apply to loans that have been taken care of either by way of reduction or settlement. The “paid in full” status will appear on a person’s credit report and is a favorable rating reviewable by future lenders. In other words, debtors should strive to have as many loans paid in full as is possible, so to avoid negative credit effects.

Debt Restructuring 

We’ve covered debt relief in the past and the circumstances under which a debtor will qualify. Debt restructuring also refers to those circumstances when a debtor seeks to renegotiate its debts with creditors to either reduce or eliminate them. Companies may also use restructuring in an attempt to make the terms of loan repayments more manageable. Common restructures include consolidations, asking for a grace period, a longer repayment period, interest elimination, penalty elimination, and so forth. Debt restructuring is a common tactic of companies with a particular need to increase liquidity for short-term goals. 

Delinquency 

Delinquent refers to the status of a loan when the debtor hasn’t made a payment on the agreed upon date set forth in the loan agreement. If a debtor misses a monthly payment, for instance, then that loan is “delinquent.” Delinquency can carry a variety of negative consequences, including additional interest, penalties and a lowered creditworthiness for the borrower. When a prospective lender scrutinizes a person’s credit report, that lender will take any past delinquencies into account. Delinquencies can affect the terms and conditions under which new loans are made by future lenders.

Our New York City Tax Attorneys Can Help!

There are plenty of other debt related terms which can be discussed. These are just a few which you’re very likely to encounter. In the future, we plan to return and discuss a few more debt related concepts in detail. At Mackay, Caswell & Callahan, P.C., we believe that educating our clients is the best means to solving their current and future tax debt issues. The more knowledge you possess, the better you’ll be able to put yourself on solid financial ground. If you have a debt related issue, feel free to call us. One of our top New York City tax attorneys will be happy to assist!

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