Arrears: Overview, definition and example
What are arrears?
Arrears happen when a payment that was due under an agreement hasn’t been made on time. In other words, it’s money that’s overdue. This can apply to anything from unpaid rent or missed loan installments to overdue invoices. When a payment is in arrears, it means the debtor hasn’t met their financial obligation, and the amount owed starts to pile up.
Why are arrears important?
Arrears matter because they signal a missed financial obligation, which can cause problems for both the person owed the money and the one who owes it. For creditors, arrears create uncertainty about cash flow and may lead to extra steps to recover the overdue amount, like adding late fees, charging interest, or even taking legal action. For debtors, falling into arrears can lead to financial strain, damaged credit, and strained business relationships. Addressing arrears quickly helps avoid bigger issues down the road.
Understanding arrears through an example
Imagine you lease office space for your business and agree to pay $2,000 in rent on the first of each month. If you miss the January payment, that $2,000 becomes arrears. If the February payment is also missed, the total arrears now climb to $4,000. Your landlord might charge late fees or interest and could even take legal action if the arrears aren’t resolved quickly.
For the landlord, unpaid rent disrupts their cash flow, so they’ll want to address the situation right away. For you as the tenant, catching up on arrears is essential to avoid eviction or further financial strain.
An example of an arrears clause
Here’s how an arrears clause might look in a contract:
“If any payment due under this Agreement is not made by the specified due date, the outstanding amount will be classified as arrears. Interest may be applied to the overdue amount at a rate of [X]% per month until full payment is received. Persistent arrears may result in additional penalties or termination of this Agreement.”
Conclusion
Arrears are a clear signal that a financial responsibility hasn’t been met. For creditors, they can disrupt cash flow and require action to recover the money. For debtors, arrears can lead to extra costs, legal problems, and damaged relationships.
By understanding what arrears are and addressing them quickly, both parties can minimize risks and avoid escalating issues. Whether you’re collecting payments or catching up on them, staying on top of arrears is crucial for keeping things running smoothly.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.