Debt Management Glossary

Amortization - The paying off of debt in regular installments.

Annual Percentage Rate (APR) - The annually compounded rate of interest paid on a loan per year. It does not take into account compounding more frequent than once per year.

Arbitration - A forum where a dispute could be settled without a trial.

Bankruptcy - the state of a person or firm unable to pay back their debt.

Budget - a list of all revenues and expenses, made to plan for saving and spending needs.

Complaint - A legal document that states the specific charges against you in a lawsuit.

Credit Counseling - a method of debt help in which the credit counseling company works with the debtor- and often negotiates with creditors- to establish a repayment plan.

Currently Not Collectible (CNC) - in the event of hardship, applying for this status using form 433-F will stop the IRS from attempting to collect taxes owed.

Debt - An amount of money owed by one person to another.

Debt Collection Agency - the company creditors sell their uncollectorable debt to.

Debt Consolidation - combining multiple debts into one.

Debt Settlement - a debt help process in which the debtor and the creditor negotiate a reduced payment for the debt, either directly or through a debt settlement company.

Debt-Snowball Method - A method of debt repayment in which the debtor pays down the debt with the smallest balance first while paying the minimum on everything else. The primary benefit of this method is the psychological benefit of seeing your debts vanish.

Debt-to-Income Ratio - The amount of money owed versus the amount made in income over a set period of time; normally used as a measure of the sustainability of debt.

Default - Fail to pay back.

Effective Annual Rate (EAR) - The rate of interest on a loan paid over the course of a year, after taking into account compounding within the year; the interest rate one actually pays on debt.

Fair Debt Collection Practices Act - A set of laws that detail the rights of debtors against debt collecting agencies.

Garnishment - forced repayment of debt collected by the creditor. The most common method of this is from an involuntary deduction of wages from a monthly paycheck to pay down debt.

Highest-Interest Method - A method of debt repayment in which the debtor pays down the debt with the highest interest rate first while paying the minimum on everything else. This method results in the lowest total amount paid and the shortest time of repayment.

Installment Credit - A form of credit with a repayment schedule set over a limited time period and regular, mostly monthly payments. Common forms include mortgage and auto loans.

Levy - When a creditor could (with a court order) go into a debtor’s bank accounts, such as checking or savings, and take money from there. This can only happen if a judgment has been made and the creditor has knowledge of the location of the accounts.

Lien - When a creditor or bank has the right to sell a debtor’s property in the event of default.

Minimum payment - the smallest amount you have to pay on a debt bill to avoid default.

Revolving Credit - a form of credit with no set time limit on repayment, but stricter credit limits and higher interest rates than comparable installment credit. Common types include credit card debt and lines of credit.

Secured Credit - creditor has the right to a pre-agreed piece of property if debtor fails to repay on this type of debt. Compared to unsecured debt, these will usually feature lower interest rates. Examples include mortgage, auto, and boat loans.

Unsecured Credit - a type of debt that, unlike secured credit, does not entitle the creditor to a piece of property even if the debtor defaults. Compared to secured debt, these will usually feature higher interest rates. Examples include credit card debts.