Financial Terms

Financial Terms

Principal

When you borrow money, the principal is the amount that you borrow, before any interest has been added to your debt.

Default

In Wisconsin, the legal default on a loan contract is 2 months and 10 days past due.  A mortgage default may be less.  Installments that were set up for weekly or bi-weekly payments, the default will be 2 payments plus 10 days past due.

Right to Cure Default

The legal notice that must be sent to you after you are in default. It will grant you 15 days to bring your loan contract current or legal action can be taken against you.

Charge Off

Each creditor has a predetermined schedule for when to consider a debt to be a loss. For example, if the cutoff is six months past due, then a creditor will write off your balance as a loss when you reach that limit. Just because a creditor charges off (writes off) your account, however, does not mean that you no longer owe money. It means that the creditor will remove your debt from their active accounts and take a tax deduction for the loss. When you repay the debt, the company must list your payments as profit on their tax return. If the creditor does not believe that you will ever repay the debt, for example, if the debtor dies or files for bankruptcy, and if the loss was for more than $700, the creditor will issue you a 1099 form for the tax year that they took the loss. You will be required to claim the charge off amount as extra income during that tax year.

R-9  or I-9  - stands for Revolving or Installment

Same as charge off, however, this is the rating that is placed on your credit bureau. Many times this rating indicates that the debt has been turned over to a collection agency.  There are additional clarification ratings that a creditor can place on your credit bureau that indicate that the debt was charged off but receiving regular payments, or that it was charged off due to bankruptcy.

Profit & Loss

Same as charge off.

Judgment

A judgment is a legal rendering that you owe the money. In Wisconsin, if your debt is in legal default, you must be given a Notice to Cure the default, and 15 days to bring your account current. If you do not bring your account current, the creditor may begin legal action against you. If your debt is smaller than $10,000, the legal action can be taken in Small Claims Court. If the balance is larger than $5,000, a Civil Action must be filed. In small claims actions, many times your notice of a hearing will come via regular or certified mail. In Civil actions, a process server or the Sheriff will personally serve you papers. If you fail to respond to the Court or are found to owe the money that the creditor says you owe, a judgment will be taken against you. In Wisconsin, a judgment must be taken first, before a creditor can garnish your wages. A judgment will show up on your credit rating, and if you are a homeowner, it may show up as a lien against your home. This means that you will not be able to sell or refinance your home or land without first satisfying the judgment. If you are not a homeowner but intend to purchase property, your mortgage holder will require you to  satisfy the judgment before the title can be transferred to your name.

Garnishment

In, Wisconsin, after a money judgment has been taken, a creditor may file a garnishment action. This action will be served on both the debtor and the debtor’s employer. The employer will be ordered by the Court to deduct 20-25% of your earnings and submit them to the creditor. There are some exemptions from garnishment that, if your qualify, will keep your wages from being garnished. You should receive an Answer to Garnishment form with your notice of garnishment action. It is important that you read the exemptions carefully and file your answer with the Court, your employer, and the creditor, if you qualify for an exemption. Be prepared to prove your exemption.

Foreclosure

If you have defaulted on your mortgage, and not cured the default within the time frame specified, your mortgage holder may sue you for the return of the collateral, in this case, your home. This is typically a last resort for creditors because of the enormous legal costs involved. It is always smart to try to work with your mortgage holder to prevent foreclosure. It may also make sense to try to sell your property yourself so that you are in control of when and how you have to move.

In Wisconsin, after a foreclosure judgment has been granted, you have at least six months to live in the house before the sheriff’s sale. During this time, you can continue to try to sell your home on your own. Typically, the mortgage holder will not accept any more money from you unless it is enough to bring your account current and pay their legal fees. This means that you are able to set aside the money that you would have been paying toward your mortgage and use it to prepare for rent, security deposit, and moving expenses. If you have a second or third mortgage, if your house is a rental property, or if you move out of your home, you may want to obtain legal advice, since your obligations and or time frame before sheriff’s sale may be different.

Credit Score

The score that the credit bureau agencies have assigned to you. This is a scientifically determined method that takes into consideration the amount and type of debt that you have and how the debt has been paid and then assigns you a score, reflecting the level of credit risk that you are. The higher the score, the less risk you present to a creditor.   You may find that the credit score that you receive when you access your credit bureau may be different than the one that your lender uses.  Often creditors will use a more stringent credit scoring model so your score with the creditor may be less than the score you are able to access.

Bankruptcy

For the average consumer, there are two types of bankruptcy: Chapter 7 and Chapter 13. In a Chapter 7, typically, the unsecured creditors are discharged and you no longer have a legal obligation to pay them. You may, however, have to agree to continue paying a secured creditor, if you desire to keep the collateral that has been pledged to them. In a Chapter 13, the secured creditors are given priority; then, if there is enough money to pay all or a portion of the unsecured creditor’s balances, over a period of three to five years, a payment plan is developed and administered by a bankruptcy trustee.

Debtors are now required to complete pre-bankruptcy counseling to determine if they qualify for either form of bankruptcy. Both chapters of bankruptcy will show up on the credit bureau for ten years . Do not take this method of debt relief lightly. Just because your friend or relative said it worked fine for them does not mean that it is the right choice for you. Many people, if they could undo choices in their life, would not have filed for bankruptcy. Ten years is a long time to be followed by a decision that you make; please make that decision cautiously.

Settlement

Often, if your account has been past due or gone unpaid for a long period of time, a creditor will offer to settle your debt for less than the stated balance. Creditors make these offers as an enticement to get you to pay and to allow them to finally close out their account with you. Normally, when an offer is made, you are required to pay the entire settlement amount within 30 days or less.  If the amount of your settlement savings is more than $700, you can expect that you will receive a 1099 form at tax time. You will be required to claim the savings amount as income on your taxes. The debt will be listed as Settled for less than the full balance, on your credit bureau, which may still be considered a negative to some lenders.

Debtor

A person who owes a debt to another.

Creditor

A person or institution who has lent money to an individual or to an entity. There should be a promissory note signed by both the debtor and the creditor, which lays out the details of the repayment contract, and the penalties if that contract is broken.

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