Glossary of Common Debt Settlement Terms

Acceleration Clause:A contractual provision that states a debtor needs to pay the full balance that is owed immediately if he/ she fails to fulfill a specific clause of the contract (i.e. late payments)

Additional Principal Payment: The extra money that is included in a monthly payment above and beyond the required minimum payment. This is applied to the outstanding balance and allows the debtor to repay the debt faster.

Adjusted Balance: The amount that a debtor continues to owe on a debt after previous payments have been subtracted from the original balance. This does not include interest or fees.

Annual Percentage Rate (APR): The cost of a loan expressed as a yearly percentage. The interest rate simply is the APR divided by 12. The law states that the creditors are obligated to reveal the APR and how it is calculated.

Arrears: The part of a debt that is overdue after the debtor has missed one or more payments. Those payments that are not made on time are called the amount in arrears.

Arbitration: A form of alternative dispute resolution where the parties and their representatives meet with a third party known as the arbitrator. The Arbitrator helps the parties come to an agreement. Credit card companies often have mandatory arbitration clauses in their contracts. The National Arbitration Forum (NAF) is the most popular venue for credit card arbitration hearings.

Bad Credit: This refers to the status of a debtor's creditworthiness, when they are regarded as "high risks" for credit lenders. Bad credit is acquired due to non-payments, late payments, overuse of credit, or bankruptcy filing.

Billing Cycle: The time period between billing statement dates, usually about 25 days.

Complaint: A formal legal document that details the facts and legal reasons why you are being sued, i.e. that the terms of the agreement between the debtor and the lender have been breached.

Credit Bureau: An agency that records consumer credit history and provides credit reports and scores. The three main agencies are Experian, Equifax, and TransUnion.

Credit Limit: The maximum amount of money that you may charge on a credit card, or take out in a loan.

Credit Line: The total amount of revolving credit that you may borrow partially or in full. After the debt is repaid, you can use the line of credit up to the limit as many times as you need.

Credit Report: A record of an individual's or company's past borrowing and repaying. Consumers have a report at each of the three main consumer credit agencies Experian, Equifax, and TransUnion. Creditors may examine it in order to determine "credit worthiness" before approving a loan.

Credit Score: A credit score is the numerical representation based on the statistical analysis of a person's credit files in order to analyze the creditworthiness of that person. A credit score is determined on the basis of information acquired from credit bureaus. Depending on the credit score, creditors decide whether or not to extend credit.

Creditor: A creditor is a party (e.g. person, organization, company, or government) which borrowers owe money for goods or services, or for repayment of a loan. If the obligation in question is a loan, the creditor may also be called the lender.

Debt Settlement: A process of negotiating with creditors in order to get a reduction in the original debt amount and interest rates.

Debtor: A debtor is the consumer who owes money to a creditor in exchange for goods, services, or for repayment of a loan.

Debt-to-income Ratio: The comparison of monthly expenses to monthly earnings expressed as a percentage.

Discharge: When a borrower is relieved of liability for repayment of debt. By filing bankruptcy usually a discharge is accomplished.

Equity: The difference between the market price of a property and any money owed on it. Equity increases as these debt claims decrease and/or the market value of the property rises.

Exemptions: An exemption allows a certain amount of income or property to be legally excluded from taxation, seizure, levy, or a lien. If the creditor wins a judgment against you, the amount of property, savings, or wages that cannot be used to satisfy the debt are considered exemptions. State tax and creditor related exemptions vary from state to state.

Garnishment: The process of deducting money from an employee's monetary compensation, including the debtor's salary. Depending on the state you live in, the creditor may be able to garnish your wages after they have won a judgment against you. In accordance with Federal law, most of states protect 75% of your net earnings. A garnishment can be reduced depending on your financial situation at the judge's discretion.

Interest Rate: The rate charged for the use of credit by the creditor/lender from the borrower. It is expressed as a percentage of the debt and is calculated for a certain period of time, often over a year.

Introductory Rate: The initial low interest rate charged on credit. The rate increases after the specified introductory period is over. The introductory rate is often a way to attract new customers.

Judgment: The judge's decision in a court case regarding the rights and responsibilities of the parties. A judgment against you will permit the creditor to put a lien against your property, levy your bank account, and take any other measures permitted by law to recover the money they are owed.

Liens: Legal notices attached to your property as a result of a monetary judgment against you. These are form of a security interest placed on property to secure the payment of a debt or some other obligation.

Levy: One of the ways for a creditor to collect on a judgment. It is similar to garnishment, but it applies specifically to bank accounts.

Liability: Liability is the legal responsibility or obligation for something. It states that those consumers who incur a debt are liable for repayment.

Minimum Payment: These are the minimum payments that you need to make on a debt in order to keep the account from defaulting. Often it incorporates only the interest on a debt, so it may not be possible to pay off some debts by only making these payments.

Over-limit Fee: The fee charged to credit borrowers who increase their balances overreaching the allowable credit limits.

Principal: The unpaid original debt amount. The principal does not include interest or fees.

Revolving Line of Credit: Revolving Line of Credit is a loan agreement in which a certain amount of money can be borrowed. Till the loan is repaid, the borrower can get hold of more money up to the limit of the agreement. For obtaining that credit one does not need to apply for a new loan. The method is widely used by Home equity lines of credit and credit cards.

Summons: A summons is a legal document issued by a court or by a government administrative agency in order to notify you of a pending suit and give you time to reply.

Secured Debt: Secured debts are those debts that are secured against a property or collateral. It protects the lender from loss in case of any default. As the debt is secured against valuable property, if your debts are not repaid, the property can be seized and sold by the lender to recover the payment. Common examples are mortgages and car loans.

Unsecured Debt: Those debts that are not secured against any property/collateral are known as unsecured debts. If an account goes into default, there is no property/collateral that can be used to cover the lender's costs. Common examples are credit cards.

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