Liability

Liability summary: 

• A liability is an amount you owe to someone else. In other words, a debt. 

• Mortgages, credit cards, and personal loans are common examples of liabilities. 

• Insolvency

  is when you have more liabilities (debts) than assets (things of value you own). 

Liability definition and meaning

When you borrow money, you create a debt. Your obligation to pay that debt is a liability. Liabilities can be long-term, like a mortgage, or short-term, like the $20 you borrowed from a coworker for lunch when you left home without your wallet.

Your liabilities matter if you plan to seek debt forgiveness

Forgiven debt is usually taxable unless you can prove you're insolvent. Insolvency means you have more liabilities than assets (things of value). In other words, you owe more than you own. 

Key summary: A liability is a financial obligation you owe to someone else.

More on liability

You've got debt and that's not unusual. Plenty of people owe money on mortgages, home equity loans, and credit cards. They're all liabilities, which is a fancy way to say debt.

If you need debt help

Liability: a comprehensive breakdown

A liability is a financial responsibility that exists when you're expected to pay money to someone else. Examples of liabilities include:

• Credit cards

• Personal loans

• Lines of credit

• Buy now, pay later (BNPL) loans

• Payday loans

• Title loans

• Mortgages and refinance loans

• Home equity loans

  and lines of credit (HELOCs)

• Car loans

• Student loans

• Friends and family loans

With each type of liability, you're supposed to repay money to a lender, usually with interest. The type of liability influences how long you'll have to pay it off. 

For example, loans have a set term that tells you the number of months or years you'll have to make payments. Credit cards are open-ended, which means there's no specific payoff date. 

Aside from borrowing, it helps to know your liability total if you're interested in your net worth. Net worth is a snapshot of your financial health

To calculate your financial health, you'll subtract your liabilities from your assets. Your assets are things you own—real estate, vehicles, bank accounts, investments, and so on. A positive net worth means you own more than you owe. A negative number means you have more liabilities than assets. Here’s a simplified example:

Assets:

Home equity: $100,000

Savings account: $10,000

Retirement account: $80,000

Liabilities:

Home mortgage balance: $100,000

Credit card balance: $5,000

Medical debt: $3,000

If this were a complete picture of this person’s liabilities and assets, they would have a positive net worth of $82,000 ($190,000 in assets minus $108,000 in liabilities).

Liability and debt relief

Debt relief means solutions that help you manage or reduce your debt. That includes:

• Debt consolidation

  . When you consolidate debt, you get a loan to pay off credit cards or other debts. You then make one payment to the loan. 

• Debt management

  . A debt management plan is a structured plan to pay off debts. You make one monthly payment to a credit counselor who distributes the money to your creditors. 

• Debt resolution

  . When you resolve debt, you get your creditors to agree to accept less than what's owed. The rest of the debt is forgiven. 

So where do liabilities fit in? Your liabilities or debts can determine which option you're eligible for. For example, if you can’t afford to fully repay your debts, you might enroll in a debt resolution program. 

In this type of program, a Debt Consultant works on your behalf to negotiate debts and arrange payments to your creditors. But you might need a minimum amount of debt to enroll. Achieve, for instance, requires a minimum of $7,500 in unsecured debt. Unsecured debts

Likewise, your liability-to-asset ratio can influence whether you have to pay taxes on forgiven debt. The IRS taxes forgiven debt unless you can show that you're insolvent

You might consider Chapter 7 bankruptcy

Talking to a debt expert could help you figure out what kind of debt relief makes sense, and whether you meet the insolvency standard.