Extinguishment of debt refers to the complete elimination or discharge of a financial obligation owed by one party to another. This typically occurs when the debtor fulfils their obligation to repay the debt in full, either through payment of the entire outstanding amount, negotiation of a settlement agreement, or fulfilment of other contractual terms. Once a debt is extinguished, the debtor is no longer legally obligated to repay the creditor, and the creditor loses the right to pursue further collection actions or legal remedies for the debt. Extinguishment of debt may also occur through legal means, such as bankruptcy proceedings, where certain debts are discharged or cancelled, relieving the debtor of further liability. Overall, extinguishment of debt represents the resolution or termination of a financial obligation, resulting in the elimination of the debtor’s legal responsibility to repay the creditor.
Extinguishment of debt refers to the elimination and/or ending of liabilities by payment.
There are a number of FASB statements providing guidance for issues related to the extinguishment of debt: FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, FASB Statement No. 64, Extinguishments od Debt Made to Satisfy Sinking-Fund Requirements, FASB Statement No. 44, Accounting for Intangible Assets of Motor Carriers, FASB Statement No. 13, Accounting for Leases, and the latest release, FASB Statement No. 145, which rescinds Statements No. 4, 44, and 64, and amends 13.
Extinguishment of debt refers to the complete elimination or discharge of a legal obligation to repay a debt, resulting in the debtor being released from the duty to pay the creditor.
Debt extinguishment can occur through various means, including:
- Payment of the debt in full by the debtor to the creditor.
- Agreement between the parties to cancel or forgive the debt.
- Operation of law, such as bankruptcy discharge or statute of limitations expiration.
Yes, debt can be extinguished through settlement or compromise agreements between the debtor and creditor, where the parties agree to accept a lesser amount or alternative terms to satisfy the debt.
Debt extinguishment relieves the debtor of the legal obligation to repay the debt, freeing them from liability, while the creditor loses the right to collect the debt and enforce repayment.
Yes, debt can be extinguished through novation, where the parties agree to replace the original debt obligation with a new agreement, substituting a new debtor, creditor, or terms of repayment.
Debt extinguishment may impact the debtor’s credit score, depending on how the debt was extinguished and whether it was reported to credit bureaus. For example, debt settlement or bankruptcy discharge can have negative effects on credit.
Debt extinguishment may have tax implications, as forgiven debt can be considered taxable income to the debtor, subject to certain exceptions or exclusions under tax laws such as insolvency or bankruptcy.
Yes, debt can be extinguished by operation of law in certain circumstances, such as when the debt becomes unenforceable due to expiration of the statute of limitations or discharge in bankruptcy proceedings.
Yes, if the creditor dies, the debt may be extinguished if the creditor’s estate does not pursue collection, although the debtor’s obligation to repay the debt may remain if it is transferred to the creditor’s heirs or successors.
This site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.
This glossary post was last updated: 29th March 2024.
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