What is Debt Retirement?

Mary McMahon
Mary McMahon

Debt retirement is a satisfaction of the terms of a debt by paying it, along with any associated fees, in full, ending the debt obligation. This is often an ongoing process for companies and governments, many of which issue periodic debt to pay for operations and must steadily repay older debts even as they incur new ones. Individuals can also take on debts like mortgages, personal loans, car loans, and so forth and must pay them off.

Corporations and governments often manage debt retirement by setting up what is known as a sinking fund.
Corporations and governments often manage debt retirement by setting up what is known as a sinking fund.

Corporations and governments often manage debt retirement by setting up what is known as a sinking fund. They deposit funds from earnings into the sinking fund periodically, basing the size of deposits either on a percentage of the debt or a percentage of earnings. This ensures that money will be available as debts come due, allowing them to retire the debt and making room to take on more debt obligations to cover new expenses. Setting up a constant system of taking on new debt while discharging old is a common practice, ensuring a steady supply of credit and funds for various activities.

Debts can include bond issues, where investors loan money to the government or corporations in exchange for interest earnings and expect to have the bond redeemed in the future. Other types of debts can include loans from financial institutions or other governments. In all cases, to take out debt, an ability and plan to repay must be demonstrated. For an entity like a government, it would need to show that it is not carrying too much debt to handle, and that it has funds in place for debt retirement.

After debt retirement, the contractual relationship between creditor and debtor ends. It may be possible to borrow more money on a new contract, and in other cases, the parties to the transaction may part ways. If another loan is made, the debtor will need to provide supporting documentation and go through the application process all over again, as the loan is brand new, and circumstances or lending policies may have changed since the last loan.

Sometimes, people accomplish debt retirement by borrowing money to pay off loans. This is known as debt consolidation and can have a number of advantages. It is usually easier to pay off one loan than multiple debts, and it may be possible to access a lower interest rate on the single loan, cutting down the costs of debt servicing. Debt servicing includes payments on interest and other fees associated with a debt, and can become extremely expensive over time.

Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a wiseGEEK researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

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