Business, Legal & Accounting Glossary
the state of being behind in payments
n. money not paid when due, usually the sum of a series of unpaid amounts, such as rent, instalments on an account or promissory note, or monthly child support. Sometimes these are called “arrearages.
Arrears, or arrearages is a legal term for a type of debt which is overdue after missing an expected payment. Arrears accrue from the date on the first missed payment was due. The term is often used to describe being late with rent, royalties (or other contractual payments), child support, or other legal financial obligation.
This should not be confused with the singular “arrear”, which is usually used to describe contractual entitlements which fall due to be paid at the end of an accrual period, such as an interest payment or a job wage or salary.
For example, a housing tenant who is obliged to pay rent at the end of each month, but who has not paid rental due for 90 days is said to pay rent in arrear, but to be three months in arrears.
“Arrears” is, further, not a late payment or charge for late rent, but the state of being late for rent. Charges such as this are impermissible under most Landlord/Tenant agreements.
In accounting, arrears is used in at least two situations. One use involves the past, omitted dividends on cumulative preferred stock. If a corporation fails to declare the preferred dividend, those dividends are said to be in arrears. The dividends in arrears must be disclosed in the notes (footnotes) to the financial statements. (Cumulative preferred stock requires that any past, omitted dividends must be paid to the preferred stockholders before the common stockholders will be paid any dividend.)
Another use of the word arrears occurs with annuities (an annuity is a series of equal amounts occurring at equal time intervals, such as $1,000 per month for 20 years). If the recurring amount comes at the end of each period, the annuity is described as an annuity in arrears or as an ordinary annuity. A loan repayment schedule is usually an annuity in arrears. For example, you borrow $10,000 on September 30 and your first monthly payment will be due on October 31, the second payment will be due on November 30, and so on.
Arrears highlight the fact that it’s important you keep up-to-date with the monthly repayments on your mortgage. When mortgage payments have not been paid on time and/or not made at the correct amount, borrowers are said to be in arrears.
Borrowers with a history of mortgage arrears will find it harder to effect a further mortgage with their current lender or a new lender in the future.
Although there are a number of lenders who will consider lending to individuals with poor credit history, it will cost more than an ordinary mortgage because of the risk-premium being charged by the lender.
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This glossary post was last updated: 26th April, 2020 | 2 Views.