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Simple English definitions for legal terms
negative amortization
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A quick definition of negative amortization:
Negative amortization is when you don't pay all the interest on a loan right away, but instead let it add up and get bigger. This means you end up owing more money in the long run. It's often used in a bankruptcy plan, where the debtor can't afford to pay all the interest right away. The plan says that the interest can be added to the amount owed, and paid later when the debtor has more money or sells the thing they used as collateral for the loan. How much the interest adds up depends on how much interest is being charged and how much is being paid each month.
A more thorough explanation:
Negative amortization is a term used in bankruptcy cases to refer to a situation where part or all of the interest on a secured claim is not paid currently but instead is deferred and allowed to accrue. This means that the interest payments on an existing debt are added to the principal and paid at a later time when the debtor has more income or sells the collateral.
For example, let's say a person has a mortgage with a monthly payment of $1,000. However, the interest rate on the mortgage is 8%, and the monthly interest payment is $1,333. This means that the person is not paying enough to cover the interest, and the unpaid interest is added to the principal. Over time, the principal balance increases, and the person owes more than they originally borrowed.
Negative amortization can be a useful tool in bankruptcy cases because it allows debtors to reduce their monthly payments and make them more manageable. However, it also means that the debtor will owe more in the long run and may have to pay more interest over the life of the loan.