Arrears

Business, Legal & Accounting Glossary

Definition: Arrears


Arrears

Quick Summary of Arrears


The state of being behind in payments. The unpaid portion of a serial bond at maturity.




What is the dictionary definition of Arrears?

Dictionary Definition


  1. Work to be done, obligation.
  2. Unpaid debt.

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.


Full Definition of Arrears


Arrears, or arrearages is a legal term for a type of debt that 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.

Accounting

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.

When most people consider arrears, they immediately think of some kind of debt that is not being paid on time. While when it comes to investing, the application is a little different, that still serves as a workable definition for arrears. In the world of stocks, bonds, and trading, back dividends that are owed to shareholders of the company are referred to as arrears.

In an identical application, arrears may also be used to refer to interest payments to bondholders that were not paid at the time when they were due. In this article, I have written how the concept of arrears works, and how it is possible for companies to find themselves in arrears having dividend and interest payments.

Investment in a company using Serial bonds

For investing within a company the serial bond is often one of the mechanisms. As soon as serial bonds get matured, they accrue an amount of interest that is due to the holder of the bond. As the bond reaches maturity, the interest is calculated and the bondholder gets the payment.

However, if at the time the bond reaches maturity a company is unable to meet the payments on the interest, then the corporation may approach the bondholder having a plan to revise the payment schedule or to make arrangements to pay off the interest by a certain future date. In either of the two scenarios, the company will be considered in arrears until that the bondholder is given a full interest payment.

Dividend payment on Stocks

In a similar scenario to the mature bond, stocks yield a return and on a recurring basis, dividends are paid to the shareholders. When a company is unable to pay a dividend payment on time, then the amount of the payments that are left behind is considered to be in arrears.

As with the bond issue, shareholders may be asked by the companies to work with them and to accept an alternate payment schedule for the dividends. Once that the payment schedule is in place, and that first agreed-upon dividend payment has been received by the shareholder, the company is not considered to be in arrears any longer.

Arrears are uncommon for Businesses

When someone is experiencing business management, then they may observe that during the course of a fiscal year it is not that much uncommon for businesses to experience some sort of arrearage. Often, innocuous matters are the causes of the state of arrears, such as a delay in calculating the interest or dividends that are due.

Usually, in a very short period of time this sort of delay is resolved, what it means is that rather than in longer increments of time, the state of arrears may be measured in days or weeks.

Frequency of arrearage occurrence

Still, the frequency with which the arrearage occurs with a given corporation as well as the average duration that payment remains in arrears is important to consider. Frequent slow payments to investors may show a sign that the organization is not as financially stable as it should be, and specifically if it takes months for the payments to process.


Synonyms For Arrears


Arrearages


Related Phrases


dividend in arrears
arrears swap
annuity in arrears
in arrears


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Definition Sources


Definitions for Arrears are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 13th November, 2021 | 18 Views.