Key Takeaways

  • Arrearage refers to overdue amounts on loans, dividends, payroll, or other financial obligations. It reflects the state of being behind on payments.
  • Being paid in arrears means payment occurs after services are rendered or a pay period has ended — common in payroll and service contracts.
  • Arrearages can accumulate in areas like dividends, mortgages, rent, payroll, and child support, often resulting in legal or financial penalties if not addressed.
  • Proper accounting practices, regular audits, and payment schedules help manage arrearages effectively and avoid credit damage.
  • Legal action, payment plans, and negotiation are key options when an individual or business is in arrears and unable to meet obligations.

The arrearages legal definition is the amount of a loan, shares of a preferred stock, or any other form of credit which is overdue. Arrears is another term that means the same thing as arrearages. When a company doesn't pay out dividends to shareholders, these dividends accumulate, meaning that in the future it's required that the company pay arrearage to stockholders before current dividends.

The difference between arrears and arrearage is subtle, but important. Arrears refers to the actual unpaid obligation to a debt, while arrearage refers to the condition of being in debt. Thus, arrearage means one is in arrears. Learn more about what it means to be in arrears, and all you need to know about arrearage, what it means for the debts you owe or are owed, and the effect it has on your finances.

Being Paid in Arrears

There are a couple of potential meanings to the phrase, “paid in arrears.” It often refers to the practice of compensating the provider of a service after they have completed the agreement of a contract. Such agreements state that payment will be made after a certain period expires, as opposed to in advance. This can apply to contracted work or payroll.

Arrears can also refer, however, to the condition of a business being behind on owed payments. In such a case, arrears amounts accumulate from the date a payment has been missed. Accounts that are paid from the date of the oldest payment, and continue to be considered arrearage until the count is brought current.

Arrearage in Different Financial Contexts

The concept of arrearage extends beyond payroll and service contracts to various areas of finance and law. Common examples include:

  • Loan Arrearage: Missed mortgage or loan payments create arrearages that can result in late fees, increased interest, or foreclosure if unresolved.
  • Dividend Arrearage: When a company issues cumulative preferred stock but fails to pay dividends, these unpaid amounts accumulate as arrearages. Shareholders must receive these back payments before new dividends are distributed.
  • Rent Arrearage: Landlords may pursue eviction or legal action if tenants fall behind on rent payments, and arrearages must be paid to restore the lease.
  • Child Support Arrearage: Courts can enforce payment of overdue child support, often with interest, wage garnishment, or even legal penalties if obligations remain unmet.

Understanding these different forms of arrearage is essential for both creditors and debtors to navigate potential legal consequences and resolve outstanding obligations.

Arrearage and Accounting

Arrears also form an important part of accounting practices, which allows for a better way of managing small business cash flow. Instead of paying on delivery for services rendered, many small businesses institute an arrearage policy, paying on a net 30, net 45 or other basis, meaning that it pays within a set number of days after the invoice is received or after delivery, as specified in the agreement. A net 30 arrearage, for example, promises payment within 30 days.

This allows the business to acquire payment from its own debtors before paying their creditors. It basically allows space to get what you need before meeting your obligations.

Legal and Credit Consequences of Arrearages

Failing to address arrearages can lead to significant legal and financial repercussions. Creditors may initiate lawsuits, secure judgments, or place liens on property to recover overdue payments. In cases involving secured loans, such as mortgages, persistent arrearage can trigger foreclosure proceedings.

From a credit perspective, unpaid arrearages are typically reported to credit bureaus, which can severely damage credit scores and limit access to future financing. Businesses, too, risk strained vendor relationships, disrupted cash flow, and diminished credibility if arrearages are not promptly managed.

Arrearage in Payroll

In payroll, arrearage refers to what is commonly known as “paying a week behind.” Instead of paying employees on their current pay, you are paying for the week (or other pay period) previously completed. The advantages to this are that it enables more accurate tracking of payroll:

  • With a current pay arrangement, employers need to submit timesheets for employees before the work week is finished.
  • This can lead to inaccuracies in benefits, tax, and other important deductions.
  • Paying in arrears ensures a greater degree of accuracy for all aspects of the pay period, and it's a benefit to employees, who receive an extra paycheck after leaving a job.
  • There are downsides to this form of payment:
    • Employees who don't work set hours every week (such as hourly part-time workers) need to be aware of how their pays run so they can keep track of what to expect in a check.
    • Employees who don't work the requisite hours to qualify for their voluntary deductions will come out of the following period's check.

Managing Arrearage

If you're paying in arrears, whether it's payroll or for services rendered, it's important to stay up to date on your accounts. Conduct regular accounts payable audits to be sure you are current. Keep tabs on everyone that owes you money, and if your debtors are constantly behind on payments it could be a sign of a serious problem.

If you note that a debtor is seriously in arrears, you may consider suspending business with them until they bring their accounts current. This will protect your business.

Strategies to Resolve Arrearage

When arrearages accumulate, proactive measures can help prevent escalation:

  • Payment Plans: Negotiating installment plans with creditors or agencies can make repayment manageable and reduce legal risks.
  • Debt Consolidation: Combining multiple debts into a single payment can simplify repayment and lower interest rates.
  • Refinancing: Restructuring loan terms can help lower monthly obligations and bring accounts current.
  • Legal Assistance: For significant arrearages, legal counsel can help negotiate settlements, prevent judgments, or represent you in court proceedings.

In child support or tax arrearage cases, contacting the relevant government agency promptly is essential to avoid wage garnishment or legal penalties.

When You Are in Arrears

It's important to remember when you're in arrears that just because you have begun making regular payments, this doesn't mean your accounts are up to date. If you make only minimum payments, your account will remain past due. It's important to catch up on your arrearage as soon as possible, to avoid serious issues with your company's credit and accounts.

Best Practices to Prevent Future Arrearages

Once arrearages are resolved, implementing sound financial habits can help avoid future issues:

  • Automate Payments: Set up automatic transfers for recurring obligations like rent, loans, or payroll taxes.
  • Maintain a Reserve Fund: Keeping a financial cushion helps cover payments during income fluctuations.
  • Review Payment Schedules: Align due dates with your cash flow to minimize the risk of missed payments.
  • Monitor Accounts Regularly: Early detection of potential shortfalls allows time to address issues before they become arrearages.

Staying proactive not only helps maintain financial stability but also protects creditworthiness and business relationships.

Frequently Asked Questions

  1. What does arrearage mean in legal terms?
    Arrearage refers to overdue amounts owed under a legal obligation, such as unpaid loan installments, dividends, rent, payroll, or child support.
  2. How is arrearage different from arrears?
    "Arrears" typically describes the unpaid debt itself, while "arrearage" refers to the condition of being behind on payments.
  3. Can arrearages affect my credit score?
    Yes. Missed payments that result in arrearage are often reported to credit bureaus and can significantly damage your credit rating.
  4. What happens if I can’t pay my arrearages?
    Creditors may pursue legal action, obtain a judgment, garnish wages, or seize property. Negotiating payment plans or seeking legal assistance is advisable.
  5. How can businesses avoid arrearages?
    They can implement regular cash flow monitoring, automate payments, negotiate clear payment terms with clients, and conduct periodic accounts receivable audits.

If you need help with the arrearage, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.