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Simple English definitions for legal terms
debt
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A quick definition of debt:
Debt is when someone owes money to another person or organization. It's like borrowing money and promising to pay it back later, usually with extra money called interest. Debt can come in different forms, like loans, bonds, or credit card bills. Sometimes, governments or companies borrow money too. If someone can't pay back their debt, the person or organization they owe money to might take legal action or the debtor might file for bankruptcy.
A more thorough explanation:
Debt is when one person owes money to another person. It has two parts: the amount of money borrowed (called the principal) and the extra money paid back for borrowing (called interest). There are different types of debt, but they all depend on four things: how much money is borrowed, how long it takes to pay it back, how much interest is charged, and how often interest is calculated.
For example, someone might borrow $1,000 and pay it back over ten years with 2% interest added twice a year. Or they might borrow $1,000 and pay it back over five years with 5% interest added once a year.
People, companies, and governments can all have debt. Companies might borrow money by selling bonds to investors. Governments might borrow money by selling bonds to investors too, or by issuing treasury bills, notes, or bonds. Debt issued by local governments is called municipal bonds. The total amount of debt owed by the federal government is called the national debt.
Debt can take many forms, like loans, bonds, promissory notes, debentures, mortgages, and credit card balances. Debt can be secured, which means the borrower promises to give something else as collateral if they can't pay back the debt. Debt can also be unsecured, which means there's no collateral. Debt can be recourse, which means the lender can go after the borrower's personal assets if they don't pay back the debt. Debt can also be nonrecourse, which means the lender can't go after the borrower's personal assets.
If someone can't pay back their debt, the lender can take legal action. If the lender wins, they can try to collect the debt. If the borrower still can't pay, they might file for bankruptcy. Even if the lender wins in court, they still have to follow the state's rules for collecting debt.
For example, if someone borrows $10,000 from a bank and can't pay it back, the bank might take them to court. If the bank wins, they might be able to take money from the borrower's bank account or paycheck. If the borrower still can't pay, they might file for bankruptcy. Even if the bank wins in court, they still have to follow the state's rules for collecting debt.