Definition of Creditor

Creditor

Lender of money.

Creditor

Person or business that is owed money.

Best-interests-of-creditors test

The requirement that a claim holder voting against a plan of reorganization
must receive at least as much as he would have if the debtor were liquidated.

Creditors

Purchases of goods or services from suppliers on credit to whom the debt is not yet paid. Or a
term used in the Balance Sheet to denote current liabilities.

Creditor Proof Protection

The creditor proof status of such things as life insurance, non-registered life insurance investments, life insurance RRSPs and life insurance RRIFs make these attractive products for high net worth individuals, professionals and business owners who may have creditor concerns. Under most circumstances the creditor proof rules of the different provincial insurance acts take priority over the federal bankruptcy rules.
The provincial insurance acts protect life insurance products which have a family class beneficiary. Family class beneficiaries include the spouse, parent, child or grandchild of the life insured, except in Quebec, where creditor protection rules apply to spouse, ascendants and descendants of the insured. Investments sold by other financial institutions do not offer the same security should the holder go bankrupt. There are also circumstances under which the creditor proof protections do not hold for life insurance products. Federal bankruptcy law disallows the protection for any transfers made within one year of bankruptcy. In addition, should it be found that a person shifted money to an insurance company fund in bad faith for the specific purpose of avoiding creditors, these funds will not be creditor proof.

Creditor (Credit Insurance)

A lender or lending institution that offers financing and loans to a borrower, for the purpose of acquiring a commodity.

Absolute priority

Rule in bankruptcy proceedings whereby senior creditors are required to be paid in full
before junior creditors receive any payment.

Asset for asset swap

creditors exchange the debt of one defaulting borrower for the debt of another
defaulting borrower.

Business failure

A business that has terminated with a loss to creditors.

Cramdown

The ability of the bankruptcy court to confirm a plan of reorganization over the objections of
some classes of creditors.

Debenture bond

An unsecured bond whose holder has the claim of a general creditor on all assets of the
issuer not pledged specifically to secure other debt. Compare subordinated debenture bond, and collateral
trust bonds.

Debt/equity ratio

Indicator of financial leverage. Compares assets provided by creditors to assets provided
by shareholders. Determined by dividing long-term debt by common stockholder equity.

Debt service

Interest payment plus repayments of principal to creditors, that is, retirement of debt.

Leverage ratios

Measures of the relative contribution of stockholders and creditors, and of the firm's ability
to pay financing charges. Value of firm's debt to the total value of the firm.

Liquidation

When a firm's business is terminated, assets are sold, proceeds pay creditors and any leftovers
are distributed to shareholders. Any transaction that offsets or closes out a Long or short position. Related:
buy in, evening up, offsetliquidity.

Liquidator

Person appointed by unsecured creditors in the United Kingdom to oversee the sale of an
insolvent firm's assets and the repayment of its debts.

Prepackaged bankruptcy

A bankruptcy in which a debtor and its creditors pre-negotiate a plan or
reorganization and then file it along with the bankruptcy petition.

Receiver

A bankruptcy practitioner appointed by secured creditors in the United Kingdom to oversee the
repayment of debts.

Stakeholders

All parties that have an interest, financial or otherwise, in a firm - stockholders, creditors,
bondholders, employees, customers, management, the community, and the government.

Subordinated debenture bond

An unsecured bond that ranks after secured debt, after debenture bonds, and
often after some general creditors in its claim on assets and earnings. Related: Debenture bond, mortgage
bond, collateral trust bonds.

Workout

Informal arrangement between a borrower and creditors.

ACCOUNTS PAYABLE

Amounts a company owes to creditors.

LIABILITIES

What a company owes to its creditors. In other words, debts.

RATIO OF DEBT TO STOCKHOLDERS’ EQUITY

A ratio that shows which group—creditors or stockholders—has the biggest stake in or the most control of a company:
(Total liabilities) / (Stockholders’ equity)

Current liabilities

Amounts due and payable by the business within a period of 12 months, e.g. bank overdraft, creditors and accruals.

Working capital

Current assets less current liabilities. Money that revolves in the business as part of the process of buying, making and selling goods and services, particularly in relation to debtors, creditors, inventory and bank.

acid test ratio (also called the quick ratio)

The sum of cash, accounts receivable, and short-term marketable
investments (if any) is divided by
total current liabilities to compute this ratio. Suppose that the short-term
creditors were to pounce on a business and not agree to roll over the
debts owed to them by the business. In this rather extreme scenario, the
acid test ratio reveals whether its cash and near-cash assets are enough
to pay its short-term current liabilities. This ratio is an extreme test that
is not likely to be imposed on a business unless it is in financial straits.
This ratio is quite relevant when a business is in a liquidation situation
or bankruptcy proceedings.

financial accounting

a discipline in which historical, monetary
transactions are analyzed and recorded for use in the
preparation of the financial statements (balance sheet, income
statement, statement of owners’/stockholders’ equity,
and statement of cash flows); it focuses primarily on the
needs of external users (stockholders, creditors, and regulatory
agencies)

Annual report

A report issued to a company’s shareholders, creditors, and regulatory
organizations at the end of its fiscal year. It typically contains at least an income
statement, balance sheet, statement of cash flows, and accompanying footnotes. It
may also contain management comments, an audit report, and other supporting
schedules that may be required by regulatory organizations.

liquidation value

Net proceeds that would be realized by selling the firm’s assets and paying off its creditors.

workout

Agreement between a company and its creditors establishing the steps the company must take to avoid bankruptcy.

Garnishment

A court-ordered authorization to shift employee wages to a creditor.

Cash Flow Provided or Used from Financing Activities

Cash receipts and payments involving
liability and stockholders' equity items, including obtaining cash from creditors and repaying
the amounts borrowed and obtaining capital from owners and providing them with a return on,
and a return of, their investments.

Financial Covenant

A feature of a debt or credit agreement that is designed to protect the lender or creditor. It is common to characterize covenants as either positive or negative covenants.
A positive covenant might require that the debtor maintain a minimum amount of working capital.
A negative covenant might limit dividend payments that may be made.

Materiality

A characterization of the magnitude of a financial statement item's effect on a
company's overall financial condition and performance. An item is material when its size is
likely to influence decisions of investors or creditors.

Beneficiary

This is the person who benefits from the terms of a trust, a will, an RRSP, a RRIF, a LIF, an annuity or a life insurance policy. In relation to RRSP's, RRIF's, LIF's, Annuities and of course life insurance, if the beneficiary is a spouse, parent, offspring or grand-child, they are considered to be a preferred beneficiary. If the insured has named a preferred beneficiary, the death benefit is invariably protected from creditors. There have been some court challenges of this right of protection but so far they have been unsuccessful. See "creditor Protection" below. A beneficiary under the age of 18 must be represented by an individual guardian over the age of 18 or a public official who represents minors generally. A policy owner may, in the designation of a beneficiary, appoint someone to act as trustee for a minor. Death benefits are not subject to income taxes. If you make your beneficiary your estate, the death benefit will be included in your assets for probate. Probate filing fees are currently $14 per thousand of estate value in British Columbia and $15 per thousand of estate value in Ontario.
Another way to avoid probate fees or creditor claims against life insurance proceeds is for the insured person to designate and register with his/her insurance company's head office an irrevocable beneficiary. By making such a designation, the insured gives up the right to make any changes to his/her policy without the consent of the irrevocable beneficiary. Because of the seriousness of the implications, an irrevocable designation should only be made for good reason and where the insured fully understands the consequences.
NoteA successful challenge of the rules relating to beneficiaries was concluded in an Ontario court in 1996. The Insurance Act says its provisions relating to beneficiaries are made "notwithstanding the Succession Law Reform Act." There are two relevent provisions of the Succession Law Reform Act. One section of the act gives a judge the power to make any order concerning an estate if the deceased person has failed to provide for a dependant. Another section says money from a life insurance policy can be considered part of the estate if an order is made to support a dependant. In the case in question, the deceased had attempted to deceive his lawful dependents by making his common-law-spouse the beneficiary of an insurance policy which by court order was supposed to name his ex-spouse and children as beneficiaries.

Contingent Beneficiary

This is the person designated to receive the death benefit of a life insurance policy if the primary beneficiary dies before the life insured. This is a consideration when husband and wife make each other the beneficiary of their coverage. Should they both die in the same car accident or plane crash, the death benefits would go to each others estate and creditor claims could be made against them. Particularly if minor children could be survivors, then a trustee contingent beneficiary should be named.

Mortgage Insurance

Commonly sold in the form of reducing term life insurance by lending institutions, this is life insurance with a death benefit reducing to zero over a specific period of time, usually 20 to 25 years. In most instances, the cost of coverage remains level, while the death benefit continues to decline. Re-stated, the cost of this kind of insurance is actually increasing since less death benefit is paid as the outstanding mortgage balance decreases while the cost remains the same. Lending institutions are the most popular sources for this kind of coverage because it is usually sold during the purchase of a new mortgage. The untrained institution mortgage sales person often gives the impression that this is the only place mortgage insurance can be purchased but it is more efficiently purchased at a lower cost and with more flexibility, directly from traditional life insurance companies. No matter where it is purchased, the reducing term insurance death benefit reduces over a set period of years. Most consumers are up-sizing their residences, not down-sizing, so it is likely that more coverage is required as years pass, rather than less coverage.
The cost of mortgage lender's insurance group coverage is based on a blended non-smoker/smoker rate, not having any advantage to either male or female. Mortgage lender's group insurance certificate specifies that it [the lender] is the sole beneficiary entitled to receive the death benefit. Mortgage lender's group insurance is not portable and is not guaranteed. Generally speaking, your coverage is void if you do not occupy the house for a period of time, rent the home, fall into arrears on the mortgage, and there are a few others which vary by institution. If, for example, you sell your home and buy another, your current mortgage insurance coverage ends and you will have to qualify for new coverage when you purchase your next home. Maybe you won't be able to qualify. Not being guaranteed means that it is possible for the lending institution's group insurance carrier to cancel all policy holder's coverages if they are experiencing too many death benefit claims.
Mortgage insurance purchased from a life insurance company, is priced, based on gender, smoking status, health and lifestyle of the purchaser. Once obtained, it is a unilateral contract in your favour, which cannot be cancelled by the insurance company unless you say so or unless you stop paying for it. It pays upon the death of the life insured to any "named beneficiary" you choose, tax free. If, instead of reducing term life insurance, you have purchased enough level or increasing life insurance coverage based on your projection of future need, you can buy as many new homes in the future as you want and you won't have to worry about coverage you might loose by renewing or increasing your mortgage.
It is worth mentioning mortgage creditor protection insurance since it is many times mistakenly referred to simply as mortgage insurance. If a home buyer has a limited amount of down payment towards a substantial home purchase price, he/she may qualify for a high ratio mortgage on a home purchase if a lump sum fee is paid for mortgage creditor protection insurance. The only Canadian mortgage lenders currently known to offer this option through the distribution system of banks and trust companies, are General Electric Capital [GE Capital] and Central Mortgage and Housing Corporation [CMHC]. The lump sum fee is mandatory when the mortgage is more than 75% of the value of the property being purchased. The lump sum fee is usually added onto the mortgage. It's important to realize that the only beneficiary of this type of coverage is the morgage lender, which is the bank or trust company through which the buyer arranged their mortgage. If the buyer for some reason defaults on this kind of high ratio mortgage and the value of the property has dropped since being purchased, the mortgage creditor protection insurance makes certain that the bank or trust company gets paid. However, this is not the end of the story, because whatever the difference is, between the disposition value of the property and whatever sum of unpaid mortgage money is outstanding to either GE Capital or CMHC will be the subject of collection procedures against the defaulting home buyer. Therefore, one should conclude that this kind of insurance offers protection only to the bank or trust company and absolutely no protection to the home buyer.

Segregated Fund

Sometimes called seg funds, segregated funds are the life insurance industry equivalent to a mutual fund with some differences.The term "Mutual Fund" is often used generically, to cover a wide variety of funds where the investment capital from a large number of investors is "pooled" together and invested into specific stocks, bonds, mortgages, etc.
Since Segregated Funds are actually deferred annuity contracts issued by life insurance companies, they offer probate and creditor protection if a preferred beneficiary such as a spouse is named. Mutual Funds don't have this protection.
Unlike mutual funds, segregated funds offer guarantees at maturity (usually 10 years from date of issue) or death on the limit of potential losses - at times up to 100% of original deposits are guaranteed which makes them an attractive alternative for the cautious and/or long term investor. On the other hand, with regular mutual funds, it is possible to have little or nothing left at death or plan maturity.

Current Ratio

Current assets divided by current liabilities. This ratio indicates the extent to which the claims of short-term creditors are covered by assets expected to be converted to cash in the near future.

Unencumbered

Property free and clear of all liens (creditors' secured claims).

Beneficiary (Credit Insurance)

The person or party designated to receive proceeds entitled by a benefit. Payment of a benefit is triggered by an event. In the case of credit insurance, the beneficiary will always be the creditor.

Commercial Business Loan (Credit Insurance)

An agreement between a creditor and a borrower, where the creditor has loaned an amount to the borrower for business purposes.

Critical Illness Insurance (Credit Insurance)

Coverage that provides a lump-sum payment should you become seriously ill with a specified illness. The payment is made to your creditors to pay off your debt owing.

Job Loss Insurance (Credit Insurance)

Coverage that can pay down your debt should you become involuntarily unemployed. The payment is made to your creditors to reduce your debt owing.

Mortgage (Credit Insurance)

An agreement between a creditor and a borrower, where the creditor has loaned an amount to the borrower for purposes of purchasing a loan secured by a home.

Premium (Credit Insurance)

Annual or monthly amounts payable, by a client, for a selected insurance coverage to insure debt obligations to their creditors are protected.

Strike Insurance (Credit Insurance)

Coverage that can pay down your debt should you become unemployed due to a legal strike in your place of work. The payment is made to your creditors to reduce your debt owing.

Terminal Illness Insurance (Credit Insurance)

Coverage that provides a lump-sum payment should you become terminally ill. The payment is made to your creditors to pay off your debt owing.

Waiting Period (Credit Insurance)

A specific time that must pass following the onset of a covered disability before any benefits will be paid under a creditor disability policy. (Also known as an elimination period).

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