Arrears

Arrears are debts which have not been paid in a timely manner. This definition usually applies to debts for unpaid bills or royalties and covers situations on which one or more payment schedules have been missed. Another term used for this is rearage.

In the context of individual financial stability, it is important for people to ensure that bills and other financial obligations are paid on time, and the accumulation of arrears is kept to a minimum. An individual who has too much debt inevitably sees this reflected in his or her credit score.

In the context of investment, arrears refers to dividends which have not been paid out to the company’s share holders. Upon maturity date, dividends on investments, such as stocks or bonds, should be paid out to share holders.

However, in cases of financial difficulty, the company may suspend dividend payouts. It can arrange an alternative payment schedule with its investors. In this case, the company will be in arrears until it is finally able to issue payments to its share holders.

The method in which these payments are settled also depends on the type of shares held by the investor. If the shareholder has cumulative preferred shares, then payments should be issued to him first, before common stock holders can be paid. Also, all suspended payments accumulate and will have to be paid to such shareholders.
On the other hand, should the share fall under the non-cumulative preferred category, then the company does not issue payments for previously deferred pay outs.

Another use of the term may be in the phrase “payments in arrears.” In this case, there is no negative impression attached because this describes payments which are issued after the product or service has already been provided. There is no problem with this provided that such payment was given within the time period agreed on.

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