Legal Definitions - passive debt

Passive debt refers to a financial obligation that accrues or exists automatically over time, often due to interest, fees, or pre-existing agreements, without requiring the debtor to take further active steps to incur the additional amount. It represents a liability that grows or persists due to the passage of time or the terms of an agreement, rather than through new, active transactions initiated by the debtor.

Here are some examples illustrating passive debt:

• Student Loan Interest During Deferment: A recent university graduate decides to defer their student loan payments for a year while they search for employment. During this deferment period, interest continues to accumulate on the outstanding principal balance of their loan, even though they are not making payments and not taking out any new funds.

  Explanation: The accumulating interest is considered passive debt because it grows automatically based on the terms of the loan agreement and the passage of time, without the borrower actively incurring new charges or managing the debt's increase. The debt is increasing without their direct action.

• Unpaid Homeowners' Association (HOA) Dues with Late Fees: A homeowner falls behind on their monthly HOA dues. According to the HOA's bylaws, a late fee is automatically applied each month the payment is missed, and interest also begins to accrue on the outstanding balance.

  Explanation: The recurring late fees and the accumulating interest on the unpaid dues constitute passive debt. These charges are added automatically by the HOA based on the established rules and the duration of non-payment, not due to any new action taken by the homeowner to increase their debt.

• Court Judgment with Post-Judgment Interest: A court rules against a defendant in a civil lawsuit, ordering them to pay a specific sum of money. If the defendant does not pay the judgment immediately, state law often dictates that interest will automatically accrue on the outstanding judgment amount until it is fully satisfied.

  Explanation: The interest that accumulates on the unpaid court judgment is passive debt. It accrues automatically by operation of law, adding to the total obligation without the defendant taking any further action to incur these additional amounts. The debt grows simply due to the passage of time while the judgment remains unpaid.