Debt Glossary of Terms

A debtor is one who owes money. A debtor can be an individual consumer who incurs debt for personal, family or household purposes or a business. When debt is in the form of a loan from a financial institution, then the debtor is called a borrower.

A discharge is the legal end of a bankruptcy. It releases you from most of the debts you owed when you filed. A first bankruptcy is usually discharged after 9 months, or 21 months if you have surplus income. Some debts, such as support payments and court fines, aren’t released.

An interest rate is calculated as a percentage of the principal that is charged on a daily, monthly or annual basis. Higher rates will apply to a borrower that is considered a higher risk of defaulting on a loan, while lower rates are charged for lower-risk clients.

Two calculations for interest rates are most common. A simple interest rate is the principal amount borrowed multiplied by the annual interest rate multiplied by the number of years the loan is outstanding. A compound interest rate additionally takes into account accrued interest from previous periods. There is not much difference between the two calculations for short periods, but the disparity between them increases over time.

A fixed or variable interest rate can apply to debt. A fixed interest rate (such as a fixed-rate mortgage term) remains fixed for the entire term. A variable rate fluctuates according to changes in a benchmark interest or index, such as the Bank of Canada interest rate.

A Licensed Insolvency Trustee (LIT) is a professional licensed and regulated by the Office of the Superintendent of Bankruptcy. LITs are the only professionals who can file consumer proposals and bankruptcies in Canada. They were previously called trustees in bankruptcy.

A mortgage is a loan used to raise funds for purchasing real estate or by existing property owners to raise funds for any other purpose. It involves putting a lien on property being mortgaged. The mortgage is secured using the borrower’s property as collateral, and the lender can take possession of the property if the borrower is not able to meet their payment obligations.

Personal bankruptcy is a legal process under the Bankruptcy and Insolvency Act, filed through a Licensed Insolvency Trustee. Your non-exempt assets go towards paying your creditors, and most unsecured debts are released when you’re discharged. Some debts, such as support payments, court fines and student loans less than seven years old, aren’t released. A bankruptcy stays on your credit report for several years.

Refinancing is what occurs when a person or business revises their debt repayment schedule. The old debt is paid off and replaced with a new loan on different terms. It typically extends the maturity date of the loan. Refinancing may involve a penalty or fee.

Revolving credit lets you borrow up to a set limit, repay, and borrow again. Credit cards and lines of credit are the most common types. Interest is charged on the balance you carry, and some lenders charge annual or account fees.

Secured debt is debt backed or secured by collateral (e.g., a mortgage is secured by a house, a car loan is secured by the car). If you default on repayment, the lender can seize the asset, sell it and use the proceeds to pay back the debt. Because securing debt reduces risks for the lender, the loan terms (e.g., the interest rate, loan time period) are more attractive for the consumer than with unsecured debt.

Seizure is when a creditor takes possession of your assets because you haven’t paid. For example, if you can’t keep up payments on a financed car, the lender can repossess and sell it to recover what you owe. Filing a consumer proposal or bankruptcy stops most unsecured creditors from seizing your assets.

A stay of proceedings is a legal pause that stops most unsecured creditors from suing you, garnishing your wages or collecting payments once you file a consumer proposal or bankruptcy. It doesn’t stop secured creditors, such as a mortgage lender, or the enforcement of support payments.

Surplus income is household income above a minimum set each year by the Office of the Superintendent of Bankruptcy. If you have surplus income during bankruptcy, you pay part of it to your trustee each month, and your bankruptcy lasts longer.

Unsecured debt is a loan advanced without any security provided (e.g., credit card balance, utility bills and other types of loans or credit). Unsecured debt is a higher risk to the lender and so the lender will require a higher interest rate in return.