Glossary

Personal Finance Glossary

Bankruptcy: A process in which consumers and businesses can eliminate or repay some or all of their debts under the protection of the federal bankruptcy court. Though bankruptcy can eliminate many kinds of debts, such as credit card debt, medical bills, and unsecured loans, there are many types of debts, including child support and spousal support obligations and most tax debts, that cannot be wiped out in bankruptcy.

Among the different types of bankruptcies, Chapter 7 and Chapter 13 proceedings are the most common for individuals and businesses. Chapter 7 bankruptcies normally fall in the liquidation category. This means that if you own property, it could be taken and sold in the process of liquidation in order to pay back your debts. Conversely, Chapter 13 bankruptcies generally fall under the reorganization category, meaning that you will probably be able to keep your property, but you must submit and stick to a plan that will allow you to repay some or all of your debts within three years.

Charge-off (chargeoff): The declaration by a creditor that a debt is unlikely to be collected. Traditionally this occurs when a consumer becomes 120-180 days delinquent on a debt. . The purpose of making such a declaration is to give the bank a tax exemption on the debt. The charge-off, though, does not free the debtor of having to pay the debt. The accounts are usually closed and referred to a third party for collections or sold.

Collection agency: An independent business contracted by a creditor to collect debts on their behalf for a fee or percentage of the total amount owed. Not all collection agencies can file lawsuits.

Credit Bureau: A private company that collects personal information, financial data, and alternative data on individuals from a variety of sources. These sources are typically creditors, lenders, utilities, debt collection agencies and the courts that a consumer has had a relationship or experience with. The three major credit bureaus are Equifax, Experian and TransUnion.

Credit card: A card issued by a financial company that creates a revolving account and grants a line of credit to the consumer from which the user can borrow money for payment to a merchant or as a cash advance to the user. A credit card is different from a charge card, in that a charge card requires the balance to be paid in full each month. In contrast, credit cards allow the consumers a continuing balance of debt, subject to interest being charged.

Credit counseling: A process that involves negotiating with creditors to establish new loan repayment terms, usually offering reduced payments, fees and interest rates to the consumer. A credit counseling agency typically receives a percentage of the consumer contribution as compensation from the creditors to whom the debt payments are distributed.

Credit limit: The maximum amount of credit that a financial institution or other lender will extend to a debtor for a particular line of credit (sometimes called a credit line, line of credit, or a trade-line). For example, it is the most that a credit card company will allow a card holder to take out at once on a card.

Credit report: A compilation of information collected from various sources that a consumer has had a relationship with. This report is made available on request for the purposes of assessing credit worthiness, scoring and risk assessment. This data can affect employment consideration, apartment leasing insurance approval, and loan terms. These reports are aggregated and managed by credit reporting agencies also known as credit bureaus.

Credit score (FICO): Your credit score is a three-digit number generated by a mathematical algorithm using information in your credit report, for the purpose of assessing credit risk. Credit bureau scores are often called “FICO scores” because most credit bureau scores used in the U.S. are produced from software developed by Fair Isaac and Company. FICO scores are provided to lenders by the major credit reporting agencies.

Debt consolidation: Involves taking out one loan to pay off many others. This is often done to secure either a lower interest rate, or for the convenience of paying only one loan. Typically these loans are secured against an asset that serves as collateral such as a home or an automobile.

Debt settlement: Also known as debt arbitration, debt negotiation or credit settlement, is an approach to debt reduction in which the debtor and creditor agree on a reduced balance that will be regarded as payment in full.

The Fair Debt Collection Practices Act (FDCPA): is the federal law that defines and governs how collection agencies can operate. Its purpose is to eliminate abusive practices in the collection of consumer debts, to promote fair debt collection, and to provide consumers with an avenue for disputing and obtaining validation of debt information in order to ensure the information’s accuracy.

Interest: A fee paid when money is borrowed, interest is typically paid to the lender as a percentage of the amount owed to the lender. The percentage of the principal that is paid as a fee over a certain period of time (typically one month or year) is called the interest rate. A bank deposit will earn interest because the bank is paying for the use of the deposited funds

Secured loan: A loan in which the borrower pledges some asset (e.g. a car or property) as collateral for the loan, which then becomes a secured debt owed to the creditor who gives the loan. The debt is thus secured against the collateral — in the event that the borrower defaults, the creditor takes possession of the asset used as collateral.

Unsecured Debt: A loan that is not collateralized by a lien on specific assets (car or property) of the borrower in the case of a bankruptcy or liquidation or failure to meet the terms for repayment. For example credit cards, medical bills and personal loans.

Statue of Limitations: Creditors and debt collectors have a limited time in which to sue for nonpayment of credit card bills. That time limit varies by state. In most states, the statute of limitations period on debts is between 3 and 10 years from the date of last activity on the account (usually the last payment).

Loan Modification: When a borrower — who is facing great financial hardship and is having difficulty making their mortgage payments — works with their lender to change the terms of their mortgage loan. The workout plan could result in temporary or permanent changes to the mortgage rate, term and monthly payment of the loan. The plan’s goal is to help the borrower reduce their monthly mortgage payments to 31% of their gross income.

Short sale: When a lender accepts a discount on a mortgage to avoid a possible foreclosure auction or bankruptcy. A short sale is often used as an alternative to foreclosure because it eliminates additional fees and costs to both the creditor and borrower.

Foreclosure: A legal process by which the lender takes possession and ownership of a property when the borrower defaults on the mortgage obligations. This usually involves a forced sale of the property at public auction with the proceeds of the sale being applied to the mortgage debt.

Loss mitigation: A general term that refers to the process of negotiating new mortgage terms for the homeowner that will prevent foreclosure. These new terms are typically obtained through loan modification, short sale negotiation, short refinance negotiation, deed in lieu of foreclosure, cash-for-keys negotiation, or a partial claim loan or other loan work-out.

Utilization Ratio: Credit utilization is the ratio of your credit card balances to credit limits. It compares the amount of credit being used to the total credit available to the borrower. Generally low ratio helps the credit score. It is recommended to keep the overall ratio below 40. The ratio is also known as a balance-to-limit ratio, or debt-to-limit ratio.

Summons: A legal document addressed to a defendant in a legal proceeding. Typically, the summons will announce to the person to whom it is directed that a legal proceeding has been started against that person, and that a case has been initiated in the issuing court. The summons announces a date by which the defendant(s) must either appear in court, or respond in writing to the court or the opposing party.

Judgment: A judgment is the official decision of a court of law in a lawsuit. A final judgment resolves the issues involved in the lawsuit, and determines the rights and obligations that each party in the lawsuit has.

Wage garnishment: The process of deducting money from an employee’s monetary compensation (including salary) as a result of a court order. Wage garnishments continue until the entire debt is paid or arrangements are made to pay off the debt.

Lein: A claim against property that is made in order to secure payment of a debt. The creditor may place a lien on the debtor’s property for the value of the debt owed once a court judgment is received. As a result of the lien, the real estate is used as collateral against the debt.

Federal student loan: allows students and their parents to borrow money to help pay for college through loan programs supported by the federal government. They usually have low interest rates and offer attractive repayment terms, benefits and options. Generally, repayment of a federal loan does not begin until after the student leaves school. Federal student loans can be used to pay school expenses such as tuition and fees, room and board, books, supplies and transportation. To get a federal student loan, you must complete the Free Application for Federal Student Aid (FAFSA). The easiest way to complete the FAFSA is online at www.fafsa.gov.

Types of federal student loans:
  • Perkins
  • Direct Stafford
  • Direct PLUS (graduate and professional degree student borrowers)
  • Direct PLUS (parent borrowers)
  • Direct Loan Consolidation

Private student loan: A non-federal loan issued by a lender such as a bank or credit union. Private student loans often have variable interest rates, require a credit check and do not provide the benefits of federal student loans.

Student Loan consolidation: A Direct Consolidation Loan allowing a borrower to combine multiple federal student loans into one loan. The result is a single monthly payment instead of multiple monthly payments. Most federal student loans are eligible, private education loans are not eligible for consolidation. For additional information, you can view the Checklist Tool for Consolidation or visit www.loanconsolidation.ed.gov.

Forbearance (student loans): a program that can help you avoid delinquency and default by allowing you to suspend or reduce your student loan payments under certain circumstances and for specified periods of up to one year at a time. During forbearance, you will receive quarterly interest statements and have the option to pay the accrued interest. If you don’t, any unpaid accrued interest will be capitalized.

Deferment (student loans): Deferment lets you temporarily postpone making your student loan payments. You may be granted deferment on your student loan for a variety of reasons. Deferment can be authorized for economic hardship, military deployment, and enrollment.

Rehabilitation (student Loans): is a one-time opportunity to clear the default on a defaulted federal education loan and regain eligibility for federal student aid. After the borrower has made 9 consecutive payments, the loan may be rehabilitated and the default removed from the borrower’s credit history. Rehabilitation of FFEL program loans usually requires that the loans be sold to a lender after the borrower completes the steps required to rehabilitate the loan.