Arrearage

Arrearage refers to the amount of overdue payments that are owed and unpaid. This can apply to various financial obligations, including loans, mortgages, bond interests, and dividends on cumulative preferred stock.
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Definition of Arrearage

Arrearage is a financial term used to describe the state of being behind in payment of a financial obligation, whether it’s a loan, mortgage, bond interest, or dividends on cumulative preferred stock. When a borrower fails to make a payment by its due date, the amount becomes overdue and accrues as arrearage until it is paid.

Examples of Arrearage

  1. Mortgage Arrearage: If a homeowner misses a mortgage payment in January and does not make it up, the missed payment becomes part of the mortgage arrearage. Until the January payment is made, plus any accrued interest or penalties, it remains in arrears.
  2. Loan Arrearage: A borrower on a personal loan may fail to pay an installment due in a particular month. This unpaid installment will be counted in the arrearage balance.
  3. Bond Interest Arrearage: When a bond issuer fails to pay interest payments on the scheduled date, the unpaid amount becomes bond interest arrearage.
  4. Cumulative Preferred Stock Arrearage: Dividends that are not paid to the holders of cumulative preferred stock accumulate as arrearage and must be cleared before any dividends can be paid to common stockholders.

Frequently Asked Questions

What Causes Arrearage?

Several factors can lead to arrearage, including financial hardship, mismanagement of funds, or an unexpected expense that prevents making scheduled payments.

Is Arrearage the Same as Default?

No, while arrearage refers to being behind on payments, default typically refers to a more severe situation where the borrower has failed to meet the terms of the debt agreement altogether. Arrearage can lead to default if not addressed.

How Can Arrearage Affect Your Credit Score?

Credit bureaus may report arrearage, which can lower your credit score. The longer the arrearage remains, the more significant the impact on your creditworthiness.

What Steps Can Be Taken to Resolve Arrearage?

To resolve arrearage, one can negotiate with creditors for a payment plan, seek financial counseling, consolidate debts, or in some cases, refinance the debt.

  • Account Receivable (AR): Amounts due to a company for goods or services sold on credit.
  • Bad Debt: Debt that is written off when it becomes apparent the amount owed will not be collected.
  • Delinquency: Describes the state of being past due on legal financial obligations.
  • Default: Failure to fulfill the terms of a loan or credit agreement.

Online References

  1. Investopedia - Arrearage
  2. TheBalance - What Are Arrears?
  3. Federal Student Aid - Understanding Your Repayment Options

Suggested Books for Further Studies

  1. “Principles of Accounting” by Belverd E. Needles, Marian Powers, Susan V. Crosson - An essential guide for accounting students.
  2. “Financial Accounting Theory” by William Scott - A comprehensive book on financial accounting theories and applications.
  3. “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield - This book provides in-depth coverage of intermediate-level accounting concepts.

Fundamentals of Arrearage: Finance Basics Quiz

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