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From Wikipedia, the free encyclopedia

Debt is that which is owed; usually referencing assets owed, but the term can also cover moral obligations and other interactions not requiring money. In the case of assets, debt is a means of using future purchasing power in the present before a summation has been earned. Some companies and corporations use debt as a part of their overall corporate finance strategy.[citation needed]

A debt is created when a creditor agrees to lend a sum of assets to a debtor. In modern society, debt is usually granted with expected repayment; in most cases, plus interest. Historically, debt was responsible for the creation of indentured servants.

Contents

Etymology

The word comes from the French dette and ultimately Latin debere (to owe), from de habere (to have). The letter b in the word debt was reintroduced in the 17th century, possibly by Samuel Johnson in his Dictionary of 1755— several other words that had existed without a b had them reinserted at around that time.

Payment

Before a debt can be made, both the debtor and the creditor must agree on the manner in which the debt will be repaid, known as the standard of deferred payment. This payment is usually denominated as a sum of money in units of currency, but can sometimes be denominated in terms of goods. Payment can be made in increments over a period of time, or all at once at the end of the loan agreement.

Types of debt

A company uses various kinds of debt to finance its operations. The various types of debt can generally be categorized into: 1) secured and unsecured debt, 2) private and public debt, 3) syndicated and bilateral debt, and 4) other types of debt that display one or more of the characteristics noted above.[1]

A debt obligation is considered secured if creditors have recourse to the assets of the company on a proprietary basis or otherwise ahead of general claims against the company. Unsecured debt comprises financial obligations, where creditors do not have recourse to the assets of the borrower to satisfy their claims.

Private debt comprises bank-loan type obligations, whether senior or mezzanine. Public debt is a general definition covering all financial instruments that are freely tradeable on a public exchange or over the counter, with few if any restrictions.

Loan syndication is a risk management tool that allows the lead banks underwriting the debt to reduce their risk and free up lending capacity.

A basic loan is the simplest form of debt. It consists of an agreement to lend a principal sum for a fixed period of time, to be repaid by a certain date. In commercial loans interest, calculated as a percentage of the principal sum per year, will also have to be paid by that date.

In some loans, the amount actually loaned to the debtor is less than the principal sum to be repaid; the additional principal has the same economic effect as a higher interest rate (see point (mortgage)), and is sometimes referred to as a banker's dozen, a play on "baker's dozen" – owe twelve (a dozen), receive a loan of eleven (a banker's dozen). Note that the effective interest rate is not equal to the discount: if one borrows $10 and must repay $11, then this is ($11–$10)/$10 = 10% interest; however, if one borrows $9 and must repay $10, then this is ($10–$9)/$9 = 11 1/9 % interest.[2]

A syndicated loan is a loan that is granted to companies that wish to borrow more money than any single lender is prepared to risk in a single loan, usually many millions of dollars. In such a case, a syndicate of banks can each agree to put forward a portion of the principal sum.

A bond is a debt security issued by certain institutions such as companies and governments. A bond entitles the holder to repayment of the principal sum, plus interest. Bonds are issued to investors in a marketplace when an institution wishes to borrow money. Bonds have a fixed lifetime, usually a number of years; with long-term bonds, lasting over 30 years, being less common. At the end of the bond's life the money should be repaid in full. Interest may be added to the end payment, or can be paid in regular installments (known as coupons) during the life of the bond. Bonds may be traded in the bond markets, and are widely used as relatively safe investments in comparison to equity.

Debt Syndication

There are two types of debt syndication: fund base and non fund base.

Fund Base

Cash Credit

This is the primary method in which Banks lend money against the security of commodities and debt. It runs like a current account except that the money that can be withdrawn from this account is not restricted to the amount deposited in the account. Instead, the account holder is permitted to withdraw a certain sum called "limit", "credit facility" in excess of the amount deposited in the account. Cash Credits are, in theory, payable on demand. These are, therefore, counter part of demand deposits of the Bank.

Working capital:

Firms need cash to pay for all their day-to-day activities. They have to pay wages, pay for raw materials, pay bills and so on. The money available to them to do this is known as the firm's working capital. The main sources of working capital are the current assets as these are the short-term assets that the firm can use to generate cash. However, the firm also has current liabilities and so these have to be taken account of when working out how much working capital a firm has at its disposal.

Working capital is therefore:- WORKING CAPITAL = Current Assets || stock + debtors + cash - Current liabilities Thus working capital is the same as net current assets, and is an important part of the top half of the firm's balance sheet. It is vital to a business to have sufficient working capital to meet all its requirements. Many businesses have gone under, not because they were unprofitable, but because they suffered from shortages of working capital. Working Capital Cycle

Bank Overdraft:

The word overdraft means the act of overdrawing from a Bank account. In other words, the account holder withdraws more money from a Bank Account than has been deposited in it. An overdraft occurs when withdrawals from a bank account exceed the available balance which gives the account a negative balance - a person can be said to be "overdrawn".

If there is a prior agreement with the account provider for an overdraft protection plan, and the amount overdrawn is within this authorised overdraft, then interest is normally charged at the agreed rate. If the balance exceeds the agreed terms, then fees may be charged and higher interest rate might apply

Term loan:

Term Loan are the counter parts of Fixed Deposits in the Bank. Banks lend money in this mode when the repayment is sought to be made in fixed, pre-determined installments. This type of loan is normally given to the borrowers for acquiring long term assets i.e. assets which will benefit the borrower over a long period (exceeding at least one year). Purchases of plant and machinery, constructing building for factory, setting up new projects fall in this category. Financing for purchase of automobiles, consumer durables, real estate and creation of infra structure also falls in this category.

Bill discounting:

Bill discounting is a major activity with some of the smaller Banks. Under this particular type of lending, Bank takes the bill drawn by borrower on his(borrower's) customer and pay him or her immediately deducting some amount as discount/commission. The Bank then presents the Bill to the borrower's customer on the due date of the Bill and collect the total amount. If the bill is delayed, the borrower or his customer pay the Bank a pre-determined interest depending upon the terms of transaction.

Project Financing:

Project finance is the financing of long-term infrastructure and industrial projects based upon a complex financial structure where project debt and equity are used to finance the project, rather than the balance sheets of project sponsors. Usually, a project financing structure involves a number of equity investors, known as sponsors, as well as a syndicate of banks that provide loans to the operation.

Non Fund Base

Letter of Credit:

The LC can also be the source of payment for a transaction, meaning that redeeming the letter of credit will pay an exporter. Letters of credit are used primarily in international trade transactions of significant value, for deals between a supplier in one country and a customer in another. They are also used in the land development process to ensure that approved public facilities (streets, sidewalks, stormwater ponds, etc.) will be built. The parties to a letter of credit are usually a beneficiary who is to receive the money, the issuing bank of whom the applicant is a client, and the advising bank of whom the beneficiary is a client. Almost all letters of credit are irrevocable, i.e., cannot be amended or canceled without prior agreement of the beneficiary, the issuing bank and the confirming bank, if any. In executing a transaction, letters of credit incorporate functions common to giros and Traveler's cheques. Typically, the documents a beneficiary has to present in order to receive payment include a commercial invoice, bill of lading, and a document proving the shipment was insured against loss or damage in transit. However, the list and form of documents is open to imagination and negotiation and might contain requirements to present documents issued by a neutral third party evidencing the quality of the goods shipped, or their place of origin.

Corporate finance

Panorama clip3.jpg


Working capital management

Cash conversion cycle
Return on capital
Economic value added
Just In Time
Economic order quantity
Discounts and allowances
Factoring (finance)


Capital budgeting

Capital investment decisions
The investment decision
The financing decision


Sections

Managerial finance
Financial accounting
Management accounting
Mergers and acquisitions
Balance sheet analysis
Business plan
Corporate action


Finance series

Financial market
Financial market participants
Corporate finance
Personal finance
Public finance
Banks and Banking
Financial regulation


Accounting debt

In national accounting, debts are added according to those who are indebted. Household debt is the debt held by households. "National" or Public debt is the debt held by the various governmental institutions (federal government, states, cities ...). Business debt is the debt held by businesses. Financial debt is the debt held by the financial sector (from one financial institution to another). Total debt is the sum of all those debts, excluding financial debt to prevent double accounting. These various types of debt can be computed in debt/GDP ratios. Those ratios help to assess the speed of variations in the indebtness and the size of the debt due. For example, the USA has a high consumer debt and a low public debt, while in eastern European countries the opposite tends to be true.

There are differences in the accounting of debt for private and public agents. If a private agent promises to pay something later, it has a debt, and this debt is enforceable by public agents. If a public body passes a law stating that it'll pay something later (a kind of promise), it keeps the right to change the law later (and not to pay). This is why, for instance, the money governments promised to pay for retirements does not show up in the public debt assessment, whereas the money private companies promised to pay for retirements do.

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Securitization

Securitization occurs when a company groups together assets or receivables and sells them in units to the market through a trust. Any asset with a cashflow can be securitized. The cash flows from these receivables are used to pay the holders of these units. Companies often do this in order to remove these assets from their balance sheets and monetize an asset. Although these assets are "removed" from the balance sheet and are supposed to be the responsibility of the trust, that does not end the company's involvement. Often the company maintains a special interest in the trust which is called an "interest only strip" or "first loss piece". Any payments from the trust must be made to regular investors in precedence to this interest. This protects investors from a degree of risk, making the securitization more attractive. The aforementioned brings into question whether the assets are truly off-balance-sheet given the company's exposure to losses on this interest.

Debt, inflation and the exchange rate

As noted below, debt is normally denominated in a particular monetary currency, and so changes in the valuation of that currency can change the effective size of the debt. This can happen due to inflation or deflation, so it can happen even though the borrower and the lender are using the same currency. Thus it is important to agree on standards of deferred payment in advance, so that a degree of fluctuation will also be agreed as acceptable. It is for instance common[citation needed] to agree to "US dollar denominated" debt.

The form of debt involved in banking accounts for a large proportion of the money in most industrialised nations (see money, broad money, and demand deposits for a discussion of this). There is therefore a relationship between inflation, deflation, the money supply, and debt. The store of value represented by the entire economy of the industrialized nation, and the state's ability to levy tax on it, acts to the foreign holder of debt as a guarantee of repayment, since industrial goods are in high demand in many places worldwide.

Inflation indexed debt

Borrowing and repayment arrangements linked to inflation-indexed units of account are possible and are used in some countries. For example, the US government issues two types of inflation-indexed bonds, Treasury Inflation-Protected Securities (TIPS) and I-bonds. These are one of the safest forms of investment available, since the only major source of risk — that of inflation — is eliminated. A number of other governments issue similar bonds, and some did so for many years before the US government.

In countries with consistently high inflation, ordinary borrowings at banks may also be inflation indexed.

Debt ratings, risk and cancellation

Risk free interest rate

Lendings to stable financial entities such as large companies or governments are often termed "risk free" or "low risk" and made at a so-called "risk-free interest rate". This is because the debt and interest are highly unlikely to be defaulted. A good example of such risk-free interest is a US Treasury security - it yields the minimum return available in economics, but investors have the comfort of the (almost) certain expectation that the US Treasury will not default on its debt instruments. A risk-free rate is also commonly used in setting floating interest rates, which are usually calculated as the risk-free interest rate plus a bonus to the creditor based on the creditworthiness of the debtor (in other words, the risk of him or her defaulting and the creditor losing the debt). In reality, no lending is truly risk free, but borrowers at the "risk free" rate are considered the least likely to default.

However, if the real value of a currency changes during the term of the debt, the purchasing power of the money repaid may vary considerably from that which was expected at the commencement of the loan. So from a practical investment point of view, there is still considerable risk attached to "risk free" or "low risk" lendings. The real value of the money may have changed due to inflation, or, in the case of a foreign investment, due to exchange rate fluctuations.

The Bank for International Settlements is an organisation of central banks that sets rules to define how much capital banks have to hold against the loans they give out.

Ratings and creditworthiness

Specific bond debts owed by both governments and private corporations is rated by rating agencies, such as Moody's, Fitch Ratings Inc., A. M. Best and Standard & Poor's. The government or company itself will also be given its own separate rating. These agencies assess the ability of the debtor to honor his obligations and accordingly give him or her a credit rating. Moody's uses the letters Aaa Aa A Baa Ba B Caa Ca C, where ratings Aa-Caa are qualified by numbers 1-3. Munich Re, for example, currently is rated Aa3 (as of 2004). S&P and other rating agencies have slightly different systems using capital letters and +/- qualifiers.

A change in ratings can strongly affect a company, since its cost of refinancing depends on its creditworthiness. Bonds below Baa/BBB (Moody's/S&P) are considered junk- or high risk bonds. Their high risk of default (approximately 1.6% for Ba) is compensated by higher interest payments. Bad Debt is a loan that can not (partially or fully) be repaid by the debtor. The debtor is said to default on his debt. These types of debt are frequently repackaged and sold below face value. Buying junk bonds is seen as a risky but potentially profitable form of investment.

Cancellation

Short of bankruptcy, it is rare that debts are wholly or partially relinquished. Traditions in some cultures demand that this be done on a regular (often annual) basis, in order to prevent systemic inequities between groups in society, or anyone becoming a specialist in holding debt and coercing repayment – see debt relief. An example is the Biblical Jubilee year, described in the Book of Leviticus.

Under English law, when the creditor is deceived into relinquishing the debt, this is a crime: see Theft Act 1978.

International Third World debt has reached the scale that many economists are convinced that debt cancellation is the only way to restore global equity in relations with the developing nations.

Effects of debt

Debt allows people and organizations to do things that they would otherwise not be able, or allowed, to do. Commonly, people in industrialised nations use it to purchase houses, cars and many other things too expensive to buy with cash on hand. Companies also use debt in many ways to leverage the investment made in their assets, "leveraging" the return on their equity. This leverage, the proportion of debt to equity, is considered important in determining the riskiness of an investment; the more debt per equity, the riskier. For both companies and individuals, this increased risk can lead to poor results, as the cost of servicing the debt can grow beyond the ability to pay due to either external events (income loss) or internal difficulties (poor management of resources).

Excesses in debt accumulation have been blamed for exacerbating economic problems.[3] For example, prior to the beginning of the Great Depression debt/GDP ratio was very high. Economic agents were heavily indebted. This excess of debt, equivalent to excessive expectations on future returns, accompanied asset bubbles on the stock markets. When expectations corrected, deflation and a credit crunch followed. Deflation effectively made debt more expensive and, as Fisher explained, this reinforced deflation again, because, in order to reduce their debt level, economic agents reduced their consumption and investment. The reduction in demand reduced business activity and caused further unemployment. In a more direct sense, more bankruptcies also occurred due both to increased debt cost caused by deflation and the reduced demand.

It is possible for some organizations to enter into alternative types of borrowing and repayment arrangements which will not result in bankruptcy. For example, companies can sometimes convert debt that they owe into equity in themselves. In this case, the creditor hopes to regain something equivalent to the debt and interest in the form of dividends and capital gains of the borrower. The "repayments" are therefore proportional to what the borrower earns and so can not in themselves cause bankruptcy. Once debt is converted in this way, it is no longer known as debt.

Arguments against debt

Some argue against debt as an instrument and institution, on a personal, family, social, corporate and governmental level. Islam forbids lending with interest even today, while the Catholic church allowed it from 1822 onwards, and the Torah states that all debts should be erased every 7 years and every 50 years (in the Jubilee year, as described in the Book of Leviticus).

Debt will increase through time if it is not repaid faster than it grows through interest. This effect may be termed usury, while the term "usury" in other contexts refers only to an excessive rate of interest, in excess of a reasonable profit for the risk accepted.

In international legal thought, Odious debt is debt that is incurred by a regime for purposes that do not serve the interest of the state. Such debts are thus considered by this doctrine to be personal debts of the regime that incurred them and not debts of the state.

In an economy with high interest rates, debt will be more costly to a business than more flexible dividends on equity investment. It may be easier for a struggling business to be financed through equity investment as it may be possible to avoid paying a dividend if times are hard.

Levels and flows

Global debt underwriting grew 4.3% year-over-year to $5.19 trillion during 2004. It is expected to rise in the coming years if the spending habits of millions of people worldwide continue the way they do.

See also

References

  1. ^ Joseph Swanson and Peter Marshall, Houlihan Lokey and Lyndon Norley, Kirkland & Ellis International LLP (2008). A Practitioner's Guide to Corporate Restructuring page 5. City & Financial Publishing, 1st edition ISBN: 9781905121311
  2. ^ Formally, a discount of d% results in effective interest of d / (1 − d)%.
  3. ^ 5 Ways to Get Out of Debt Faster. Kiplinger. 2007. http://www.webcastr.com/videos/informational/5-ways-to-get-out-of-debt-faster.html. 

Quotes

Up to date as of January 14, 2010

From Wikiquote

Debt is that which is owed; usually referencing assets owed, but the term can cover other obligations. A debt is created when a creditor agrees to loan a sum of assets to a debtor.

Sourced

  • It shows nobility to be willing to increase your debt to a man to whom you already owe much.
    • Cicero, Epistulae ad Familiares, II, 6, 2 (43 BC)
  • A national debt, if it is not excessive, will be to us a national blessing.
  • Be assured that it gives much more pain to the mind to be in debt, than to do without any article whatever which we may seem to want.
  • Live within your means, never be in debt, and by husbanding your money you can always lay it out well. But when you get in debt you become a slave. Therefore I say to you never involve yourself in debt, and become no man’s surety. If your friend is in distress, aid him if you have the means to spare. If he fails to be able to return it, it is only so much lost.
    • Andrew Jackson, Letter to his ward Andrew Jackson Hutchings (April 18, 1833)
  • You must, to get through life well, practice industry with economy, never create a debt for anything that is not absolutely necessary, and if you make a promise to pay money at a day certain, be sure to comply with it. If you do not, you lay yourself liable to have your feelings injured and your reputation destroyed with the just imputation of violating your word.
  • There are two things that bestow consequence; great possession, or great debts.
    • Reverend Charles Caleb Colton (1780-1832), English cleric and writer. Lacon; or, Many Things in Few Words (1823)
  • Debt is the prolific mother of folly and of crime.
  • Debt, grinding debt, whose iron face the widow, the orphan, and the sons of genius fear and hate; debt, which consumes so much time, which so cripples and disheartens a great spirit with cares that seem so base, is a preceptor whose lessons cannot be forgone, and is needed most by those who suffer from it most.
  • Put God in your debt. Every stroke shall be repaid. The longer the payment is withholden, the better for you; for compound interest on compound interest is the rate and usage of this exchequer.
  • You must pay at last your own debt. If you are wise, you will dread a prosperity which only loads you with more.
  • Solvency is maintained by means of a national debt, on the principle, “If you will not lend me the money, how can I pay you?”
  • Poverty demoralizes. A man in debt is so far a slave; and Wall-street thinks it easy for a millionaire to be a man of his word, a man of honor, but, that, in failing circumstances, no man can be relied on to keep his integrity.
  • Let every man, every corporation, and especially let every village, town, and city, every county and State, get out of debt and keep out of debt. It is the debtor that is ruined by hard times.
  • The debt was the most sacred obligation incurred during the war. It was by no means the largest in amount. We do not haggle with those who lent us money. We should not with those who gave health and blood and life. If doors are opened to fraud, contrive to close them. But don’t deny the obligation, or scold at its performance.
  • Such was the origin of that debt which has since become the greatest prodigy that ever perplexed the sagacity and confounded the pride of statesmen and philosophers. At every stage in the growth of that debt the nation has set up the same cry of anguish and despair. At every stage in the growth of that debt it has been seriously asserted by wise men that bankruptcy and ruin were at hand. Yet still the debt went on growing; and still bankruptcy and ruin were as remote as ever.
  • The human species, according to the best theory I can form of it, is composed of two distinct races, the men who borrow, and the men who lend.
    • Charles Lamb (1775-1834). ‘The Two Races of Men’, Essays of Elia (1823)
  • Slight was the thing I bought,
    Small was the debt I thought,
    Poor was the loan at best—
    God! but the interest!
  • Now a promise made is a debt unpaid, and the trail has its own stern code.
  • Our national debt after all is an internal debt owed not only by the Nation but to the Nation. If our children have to pay interest on it they will pay that interest to themselves. A reasonable internal debt will not impoverish our children or put the Nation into bankruptcy.
  • It’s dynamite to spend future earnings. I have had a taste of it myself, and it’s mighty bitter. A debt is a debt, whether it’s margins or mortgages; and debts are all the same, no matter how you try to camouflage ‘em. You never get much out of ‘em except trouble. On the farm or in Wall Street, if you use the other fellow’s money, it costs you a lot more than it’s worth.
    • Sue Sanders, Our Common Herd, ch. 25 (1940)
  • There is, of course, a gold mine or a buried treasure on every mortgaged homestead. Whether the farmer ever digs for it or not, it is there, haunting his daydreams when the burden of debt is most unbearable.
  • Wars are made to make debt.
    • Ezra Pound, Interview in Writers at Work, Second Series (1963)
  • DEBT, n. An ingenious substitute for the chain and whip of the slave-driver.
    As, pent in an aquarium, the troutlet
    Swims round and round his tank to find an outlet,
    Pressing his nose against the glass that holds him,
    Nor ever sees the prison that enfolds him;
    So the poor debtor, seeing naught around him,
    Yet feels the narrow limits that impound him,
    Grieves at his debt and studies to evade it,
    And finds at last he might as well have paid it.</poem>
    Barlow S. Vode

Unsourced

  • Borrowing is easy but the day of payment is hard.
  • Credit—a difficult subject to those who can't get any.
  • Paying of debts is, next to the grace of God, the best means in the world to deliver you from a thousand temptations to sin and vanity.
    • Delany
  • Creditors have better memories than debtors; and creditors are a superstitious sect, great observers of set days and times.
  • Run not into debt, either for wares sold, or money borrowed; be content to want things that are not of absolute necessity, rather than to run up the score.
    • Sir M. Hale
  • Debt is the worst poverty.
    • M.G. Lichtwer
  • Man hazards the condition and loses the virtues of freeman, in proportion as he accustoms his thoughts to view without anguish or shame his lapse into the bondage of debtor.
  • A true lover always feels in debt to the one he loves.
    • Ralph Washington Sockman

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Debt may refer to:


1911 encyclopedia

Up to date as of January 14, 2010

From LoveToKnow 1911

DEBT (Lat. debitum, a thing owed), a definite sum due by one person to another. It may be created by contract, by statute or by judgment. Putting aside those created by statute, recoverable by civil process, debts may be divided into three classes, (I) judgment debts, (2) specialty debts, and (3) simple contract debts. As to judgment debts, it is sufficient to say that, when by the judgment of a court of competent jurisdiction an order is made that a sum of money be paid by one of two parties to another, such a debt is not only enforceable by process of court, but it can be sued upon as if it were an ordinary debt. A specialty debt is created by deed or instrument under seal. Until 1869 specialty debts had preference under English law over simple contract debts in the event of the bankruptcy or death of the debtor, but this was abolished by the Administration of Estates Act of that year. The main difference now is that a specialty debt may, in general, be created without consideration, as for example by a bond (a gratuitous promise under seal), and that a right of action arising out of a specialty debt is not barred if exercised any time within twenty years, whereas a right of action arising out of a simple contract debt is barred unless exercised within six years. (See Limitation, Statutes Of.) Any other debt than a judgment or specialty debt, whether evidenced by writing or not, is a simple contract debt. There are also certain liabilities or debts which, for the convenience of the remedy, have been made to appear as though they sprang from contract, and are sometimes termed quasi-contracts. Such would be an admission by one who is in account with another that there is a balance due from him. Such an admission implies a promise to pay when requested and creates an actionable liability ex contractu. Or, when one person is compelled by law to discharge the legal liabilities of another, he becomes the creditor of the person for the money so paid. Again, where a person has received money under circumstances which disentitle him to retain it, such as receiving payment of an account twice over, it can generally be recovered as a debt.

At English common law debts and other choses in action were not assignable (see CHOSE), but by the Judicature Act 1873 any absolute assignment of any debt or other legal chose in action, of which express notice in writing is given to the debtor, trustee or other person from whom the assignor would have been entitled to receive or claim such debt, is effectual in law. Debts do not, as a general rule, carry interest, but such an obligation may arise either by agreement or by mercantile usage or by statute. The discharge of a debt may take place either by payment of the amount due, by accord and satisfaction, i.e. acceptance of something else in discharge of the liability, by set-off, by release or under the law of bankruptcy. It is the duty of a debtor to pay a debt without waiting for any demand, and, unless there is a place fixed on either by custom or agreement, he must seek out his creditor for the purpose of paying him unless he is "beyond the seas." Payment by a third person to the creditor is no discharge of a debt, as a general rule, unless the debtor subsequently ratifies the payment. When a debtor tenders the amount due to his creditor and the creditor refuses to accept, the debt is not discharged, but if the debtor is subsequently sued for the debt and continues willing and ready to pay, and pays the amount tendered into court, he can recover his costs in the action. A creditor is not bound to give change to the debtor, whose duty it is to make tender in lawful money the whole amount due, or more, without asking for change. (See PAYMENT.) A debtor takes the risk if he makes payment through the post, unless the creditor has requested or authorized that mode of VII. 29 a payment. The payment of a debt is sometimes secured by one person, called a surety, who makes himself collaterally liable for the debt of the principal. (See GUARANTEE.) The ordinary method of enforcing a debt is by action. Where the debt does not exceed £ioo the simplest procedure for its recovery is that of the county court, but if the debt exceeds £ioo the creditor must proceed in the high court, unless the cause of action has arisen within the jurisdiction of certain inferior courts, such as the mayor's court of London, the Liverpool court of passage, &c. When judgment has been obtained it may be enforced either by process (under certain conditions) against the person of the debtor, by an execution against the debtor's property, or, with the assistance of the court, by attaching any debt owed to the debtor by a third person. Where a debtor has committed any act of bankruptcy a creditor or creditors whose aggregate claims are not less than £50 may proceed against him in bankruptcy. Where the debtor is a company or corporation registered under the companies acts, the creditor may petition to have it wound up. (See COMPANY.) Imprisonment for debt, the evils of which have been so graphically described by Dickens, was abolished in England by the Debtors Act 1869, except in cases of default of payment of penalties, default by trustees or solicitors and certain other cases. But in cases where a debt or instalment is in arrear and it is proved to the satisfaction of the court that the person making default either has or has had since the date of the order or judgment the means to pay the sum in respect of which he has made default and has refused or neglected to pay, he may be committed to prison at the discretion of the judge for a period of not more than forty-two days. In practice, a period of twenty-one days is usually the maximum period ordered. Such an imprisonment does not operate as a satisfaction or extinguishment of the debt, and no second order of commitment can be made against him for the same debt, although where the court has made an order or judgment for the payment of the debt by instalments a power of committal arises on default of payment of each instalment. In Ireland imprisonment for debt was abolished by the Debtors Act (Ireland) 1872, and in Scotland by the Debtors (Scotland) Act 1880. In France it was abolished in 1867, in Belgium in 1871, in Switzerland and Norway in 187 4, and in Italy in 1877. In the United States imprisonment for debt was universal under the common law, but it has been abolished in every state, except in certain cases, as where there is any suspicion of fraud or where the debtor has an intention of removing out of the state to avoid his debts. (See also CONTRACT; BANKRUPTCY.)


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From BibleWiki


The Mosaic law encouraged the practice of lending (Deut 15:7; Ps 3726; Mt 5:42); but it forbade the exaction of interest except from foreigners. Usury was strongly condemned (Prov 28:8; Ezek 18:8, 13, 17; 22:12; Ps 155). On the Sabbatical year all pecuniary obligations were cancelled (Deut 15:1-11). These regulations prevented the accumulation of debt.

This entry includes text from Easton's Bible Dictionary, 1897.

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Simple English

Simple English Wiktionary has the word meaning for:

Debt is what someone owes to someone else. Usually, debt is in the form of money, but it can also be items, favors, or other things.

Types of debt

Goods, services or money borrowed with the intent of repayment (in kind or not) creates a debt. Debt can be secured or unsecured in nature.

A secured debt involves the use of collateral, which is an asset that is obligated to the debt-holder until the debt has been repaid. If the repayment is not made in full, the collateral asset is forfeited. For instance, a car loan typically creates a secured debt. If you still owe money on the car loan and do not make timely payments, the note-holder can confiscate (or repossess) the car and sell it to recoup the money still due.

An unsecured debt is more risky to the debt-holder (the lender), because in the event of non-payment of the debt, the lender has no recourse to forfeited assets to help defray the loss incurred by not receiving the expected payment(s). Credit card debt is typically unsecured. If you charge items to a credit card and do not make the monthly payments due, the credit card issuer can report the non-payment to the credit-reporting agencies, which will negatively impact your credit score, but they generally can not repossess whatever you bought with the card.


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