( A )
Amortization:
Similar to depreciation; this is the method used to periodically reduce the book value of a loan or intangible asset over a set period of time.
Annual Percentage Rate:
The Annual Percentage Rate (APR) is the annual rate of interest that represents the yearly cost of borrowing money. APR includes the interest and fees charged over a one-year period, however it does not take compounding (where interest is charged on existing charged) into account. Many types of debt include an APR such as credit cards, auto loans, mortgages and personal loans. The APR provides a bottom-line number for borrowers to compare rates among lenders in the process choosing credit card offers, mortgages, loans, etc.
Annual Percentage Yield (also known as Effective Annual Rate):
Unlike APR, the Annual Percentage Yield (APY) takes compounding interest into account which provides the effective interest rate that a borrower pays. For example, a credit card has an APR of 12% compounding monthly. If the balance owed by the borrower is $5,000, interest for one month is 1% of the balance or $50. The interest charged increases the balance to $5,050, which is the balance on which interest the following month is paid. Therefore, interest of 1% of the $5,050 or $50.50 is paid, which is slightly higher than the previous month. If that balance is carried for the year, the effective interest rate becomes 12.68%.
Asset Liquidation:
The process of converting assets into “liquid” form (i.e., cash or cash equivalents) by selling the assets for their value.
Assets:
Something of value that serves as an economic resource from which future economic benefits are expected. Assets can be tangible or intangible. Tangible assets are assets with a physical existence, such as cash, inventory, land, buildings, equipment, machinery. Intangible assets are assets that lack physical existence, such as patents, trademarks, copyrights, and goodwill. On a balance sheet, tangible and intangible assets will be classified as “Current Assets” or “Non-Current Assets.” Current assets are assets that will be used up or converted into cash within one year, such as cash, accounts receivable, prepaid expenses, and inventory. Non-current assets are assets whose value will not be realized within one year and are not easily convertible into cash, such as land, buildings, equipment, machinery, and intangible assets.
( B )
Balance Transfer:
Moving a balance from one account to another account, which is often an account at another financial institution. It is commonly used to transfer outstanding debt owed on a higher-interest credit card to a lower-interest account held at another credit card company. Credit card companies sometimes offer promotions for 0% APR on balance transfers for a certain number of months, however a balance transfer fee in the form of a percentage of the amount transferred may apply.
Balloon Payment:
A payment (usually larger than previous payments) for the remaining balance owed on a loan at the end of the loan term. At the end of the erm, the borrower must make a balloon payment for the total remaining balance due on the loan, or the borrower can choose to refinance the loan for new terms and rates. Balloon loans sometimes allow the borrower to automatically transfer the remaining balance into a long-term mortgage.
Bankruptcy:
A legal proceeding involving a person or business that is unable to repay their outstanding debts. The bankruptcy process begins with a petition filed by the debtor, which is most common, or on behalf of creditors, which is less common. All the debtor’s assets are measured and evaluated, and the assets may be used to repay a portion of outstanding debt.
Basis:
Generally the amount of your capital investment in property for tax purposes, which is typically the amount the asset costed you. The cost if the amount you pay for the asset in cash, debt obligations, and other property or services, which also includes sales tax and other expenses connected with the purchase. Basis is used for many purposes such as to figure depreciation and amortization, which result in a reduction over time to provide the adjusted basis in the asset for tax purposes. The adjusted basis is then used to calculate any gain or loss on the sale, exchange, or other disposition of the property.
Book Value:
An asset’s carrying value on the balance sheet after reducing for accumulated depreciation.
( C )
Capital Assets:
An item owned (by individuals or businesses) for investment or personal purposes, such as stocks, bonds or collectibles. When a capital asset is sold, the seller will earn a capital gain or a capital loss (depending on whether the price exceeds the adjusted basis in the asset). If the capital asset was held for longer than one year, any gain recognized upon the sale asset will be sold at a special long-term capital gains rate (which is lower than ordinary rates). For tax purposes, there are types of assets that are excluded from being considered a capital asset, including: inventory, property used in a trade or business, accounts or notes receivable associated with the operation of a business, and supplies regularly used or consumed in the ordinary course of a trade or business.
Chapter 7 Bankruptcy:
A chapter 7 bankruptcy can help a company go out of business by providing an orderly liquidation of the company while eliminating the need to address creditors individually. Unlike chapter 11 bankruptcy, a chapter 7 bankruptcy does not allow for continued operation of the company. Filing under this chapter will shut down your company and put a chapter 7 trustee in charge of the liquidation of assets.
Chapter 11 Bankruptcy:
Chapter 11 bankruptcy allows for a “reorganization” of the company, and is available to most corporations, partnerships, and limited liability companies. Chapter 11 is generally the most complex and expensive form of bankruptcy. Unlike a chapter 7 bankruptcy, where the trustee takes control of all of the company’s assets and sells them, in a chapter 11, you have the opportunity to stay in control of your company while you reorganize the company’s debts and try to reemerge as a healthy organization.
Collateral:
An asset pledged by a borrower that a lender accepts as security for a loan. If a borrower defaults on their loan payments, the lender has the right to seize the collateral and sell it to recoup any losses.
Collections:
When a creditor, or a business, like a utility company, sells past-due debt to a collection agency to recover the amount owed. The delinquent debt could be past due credit card debts, utility charges, medical bills, cell phone bills, or other payments that are over 6 months past due. Collection agencies attempt to recover past-due debts by contacting the borrower via phone and/or mail. See the Fair Debt Collection Practices Act for laws that protect consumer rights and limits actions of third-party debt collectors during the collections process.
Credit Card Charge-Offs:
These occur when a borrower does not pay the full minimum payment on a debt for several months (typically 6 months). At that time, the creditor writes it off as a bad debt. Note that a credit card charge-off doesn’t absolve a borrower of responsibility for the debt. Interest is still owed on the balance. Even after a credit card charge-off, the lender still has the right to collect the debt and could turn over the account to a collections agency. Also, the borrower’s credit score will likely be significantly negatively affected.
Creditor:
A person or an institution (typically a financial institution) that extends credit intended to be repaid on a future date.
( D )
Debts:
Money owed to a lender (such as to a credit card company or mortgage lender).
Debt Consolidation:
The combining of several loans or liabilities (such as credit cards or bank loans) into a new loan with one monthly payment. While debt consolidation loan does not erase the debt, borrowers may be able to combine debt into a new loan that may have favorable payoff terms such as a lower interest rate and/or lower monthly payment. However, beware that consolidating existing debt into a new larger piece of debt may initially have a negative impact on the borrower’s credit score.
Debtor:
An individual or a company that owes money. If the debt is a loan from a financial institution, the debtor is called a “borrower,” and if a debt is in the form of securities (such as bonds) the debtor is called an “issuer.” In legal terms, someone who voluntarily declares bankruptcy is also called a debtor.
Debt Settlement:
The process of negotiating with creditors to accept a percentage or portion of the full amount on debt that is charged off or severely delinquent. After the agreed upon settlement amount is paid, the remaining unpaid balance is forgiven.
Default:
On a loan, this occurs when a loan payment is not made by the borrower or for failure to repay the loan according to the payment terms of an agreement.
Deferment:
When a lender agrees that a borrower can pause making monthly loan payments for a set period of time. However, note that loans that are deferred are not forgiven as the borrower still owes the money and must repay the debt once the deferment period expires.
Delinquent:
When a borrower misses or is overdue on making a payment, such as on payments to credit cards, a mortgage, an automobile loan or other debt, it is called delinquent. The duration for being deemed delinquent varies depending on the creditor and the type of loan involved. An account that is delinquent, or late, with making payments may be charged a late fee by the creditor.
Depreciation:
The reduction in the value of an asset with the passage of time, typically calculated by allocating the cost of a tangible or physical (fixed) asset over its estimated useful life.
( F )
Fair Debt Collection Practices Act:
The Fair Debt Collection Practices Act is the main federal law that protect consumer rights during the debt collection process. It limits the behavior and actions of third-part debt collectors (collection agencies) who are attempting to collect debts on behalf of another person or entity.
Fair Market Value:
The price that an asset would sell for (or that a buyer would be willing pay) on the open market.
Fixed Rate:
An interest rate that remains the same for the life of a loan, or for a portion of the loan term, depending on the loan agreement.
Forbearance:
When a lender agrees to a lower payment or no payment for a temporary period of time. Forbearance is not the same as loan forgiveness, i.e. the loan does not go away. Once the designated forbearance time is up, the borrower may face higher payments, accrued interest, or an extended loan term.
Foreclosure:
Foreclosure is a legal proceeding that happens when a borrower does not make payments on a secured debt. The process typically results in the lender’s seizure and then sale of the property associated with the debt to recover amounts owned by the borrower. As an example, default on a mortgage could result in foreclosure and auction of the property.
( G )
Grace Period:
This may refer to a time period beyond a due date during which a borrower will not be charged a late fee. A grace period may also refer to a set period of time during which a borrow will not have to pay finance charges or interest if they pay balances in full, which is typically provided for in revolving credit card lending. A borrower is also typically protected from the risk of default during the grace period.
( L )
Liabilities:
An economic obligation that will require an outflow of economic resources (such as cash) to satisfy. On a balance sheet, liabilities are classified as either “Current Liabilities” or “Non-Current Liabilities.” Current liabilities are liabilities that are due (payable) within one year, which include accounts payable, accrued expenses (such as salaries and wages, utilities, and rent), and current portions of long-term debt. Non-current liabilities are liabilities are due (payable) in one year or more, such as notes or loans payable (net of current portion).
( M )
Merger:
The combination of two or more separate business entities in which the assets and liabilities of all the entities are transferred to one, which continues in existence, or to a new legal entity, while all the other entities cease to exist.
( O )
Operating Agreement:
A crucial document used by a Limited Liability Company (LLC) that customizes the terms of the LLC according the specific needs of its members (owners).
( P )
Pro-Rata:
A process where whatever is being allocated (for example, profit from an LLC to members) will be allocated and/or distributed according to each party or person’s proportionate share.
( Q )
Quorum:
The minimum number of members or voting power (usually a majority) of a group or organization that must be present to legally transact business in the name of that group or organization. Quorum requirements for meetings are often stated in a Corporation’s bylaws or in a Limited Liability Company’s (LLC) Operating Agreement.
( R )
Reorganization:
A reorganization is process where a troubled company performs an overhaul of its business in order to restore itself to profitability. This overhaul may involve major changes to its operations, staff, budgets, and setup.
( S )
Secured Debt:
Debt secured by collateral to reduce the risk associated with lending (reduces risk to the lender). In the event of default by the borrower, the lender may seize the asset or collateral used to acquire the debt to recoup the funds advanced to the borrower. Examples of secured debt are mortgages and auto loans. In these cases, the item being financed is the asset or collateral for the financing.
Subchapter 5 Reorganization:
A subchapter of Chapter 11 Bankruptcy created by the Small Business Reorganization Act to distinguish small business bankruptcies from larger Chapter 11 bankruptcies and provide a faster and less costly path to reorganization.
Small Business Reorganization Act:
A law signed in 2019 that aims to make small business bankruptcies faster and less expensive.
( U )
Unsecured Debt/Loan:
This refers to a loan that is not backed or secured by an asset or collateral, and is therefore riskier than secured debt for the lender. The interest rate for unsecured debt is typically higher than for secured debt.
Is there a term we’re missing? Let us know at legal@mi-community.org.
Please note: The information found in these videos and other resources is meant as general guidance and should not be considered legal advice. To be connected with a pro bono attorney, please apply for Michigan Community Resources’ COVID-19 Virtual Legal Clinic.