Liability

Liability summary:

• A liability is a financial obligation you're responsible for.

• When your liabilities are greater than your assets, you're considered insolvent. 

• You can reduce your liabilities to improve your financial picture via debt settlement or bankruptcy.

Liability Definition and Meaning

A liability is a financial obligation you're responsible for, such as debts you've taken on. When your liabilities exceed your assets, you're considered insolvent. At that point, you could seek to reduce your liabilities by filing for bankruptcy or through debt settlement.

Comprehensive Breakdown of Liability

When you owe money, whether in the form of a mortgage or credit card balance, it's considered a liability. There may come a point when your liabilities exceed your assets. At that stage, you're considered insolvent, which means you're not capable of paying off your liabilities.

When you can't cover all of your liabilities, you have a few options. One is to file for bankruptcy and try to get as much of your debt discharged as possible. Another is a debt settlement program, which will reduce it. 

The route you take in reducing your liabilities could have an impact on your taxes. Debt that’s settled outside of a bankruptcy proceeding is usually taxable unless you’re insolvent. The IRS has an insolvency worksheet you can use to figure out your tax obligation. 

There are certain liabilities that can be discharged in a bankruptcy proceeding, and certain liabilities that can’t. Unsecured debts like credit card balances, medical bills, and personal loans can commonly be discharged. Federal student loans and taxes, however, are liabilities that are typically not discharged in bankruptcy. Similarly, some liabilities can be reduced by debt settlement, but some typically cannot be reduced. 

Key Attributes of Liabilities

Liabilities are expenses you've committed to and have a legal obligation to repay. There often needs to be some type of contract or court order involved for a given expense of yours to be considered a liability, though not always. (For example, all Americans are obligated to pay taxes, but taxpayers don’t sign a contract with the IRS.)

When you sign a mortgage, for example, that document is a binding legal contract. Because of this, a mortgage is considered a liability.

Examples of Liabilities

Any financial expense you commit to can be considered a liability. Some common liabilities include:

• Mortgages

• Auto loans

• Personal loans

• Credit card balances

• Home equity loans or lines of credit (HELOCs)

• Student loans