Loading the player...

DEFINITION of 'Toxic Debt'

Debt that has a lower chance of being repaid with interest. Toxic debt is toxic to the person or institution that will receive the payments.

This debt generally adheres to one of the following criteria: default rates for the particular debt are in the double digits, more debt is accumulated than what can comfortably be paid back, the interest rates of the obligation are subject to discretionary changes. Any debt could potentially be considered "toxic," if it imposes harm onto the financial position of the holder.

BREAKING DOWN 'Toxic Debt'

Debt is not always bad, especially if you are the lender and the borrower is making the payments. If the payments on these loans stop coming in, or are expected to stop, the debt becomes known as toxic debt. The historical costs of toxic debt securities are higher than the current market price. This can often result from unjustified high credit ratings which implies that the risk of default on the security is much lower than fundamental analysis would suggest. Junk bonds are not classified as toxic debt upon purchase, because the buyer is aware of the underlying risk of these securities.

RELATED TERMS
  1. The Toxic 100

    The Toxic 100 refers to the top 100 corporate air polluters in ...
  2. Toxic Assets

    An asset that becomes illiquid when its secondary market disappears. ...
  3. Net Debt

    A metric that shows a company's overall debt situation by netting ...
  4. Secured Debt

    Debt backed or secured by collateral to reduce the risk associated ...
  5. Long-Term Debt

    Long-term debt consists of loans and financial obligations lasting ...
  6. Debt Service

    The cash that is required for a particular time period to cover ...
Related Articles
  1. Insights

    The National Debt Explained

    We know it's growing, but we don't know exactly how. An in-depth look why the U.S. Government's debt continues to balloon and what it all means for you.
  2. Personal Finance

    Why Debt Isn’t Always a Bad Thing

    When managed properly, debt can be used to achieve a higher overall rate of return.
  3. Investing

    Will Corporate Debt Drag Your Stock Down?

    Borrowed funds can mean a leg up for companies or the boot for investors. Find out how to tell the difference.
  4. Investing

    Explaining Debt Service

    Debt service is a measure of a person or entity’s use of cash to pay interest and principal on debt obligations.
  5. Small Business

    Total Debt to Total Assets

    Total Debt to total assets, also called the debt ratio, is an accounting measurement that shows how much of a company’s assets are funded by borrowing. In business, borrowing is also called leverage.
  6. Investing

    Does 2016 Spell the End of a Global Debt Cycle?

    Examine the growth of global debt from 2010 to 2015. Emerging market debt has grown significantly, while advanced economy debt has grown marginally.
  7. Insights

    How Debt Limits A Country's Options

    While debt is fundamentally necessary to the operation of a national government, it can also be limiting and dangerous.
  8. Personal Finance

    How to Invest When You're Deep in Debt

    Debt is one of the biggest obstacles that prevents people from investing - but it shouldn't be.
  9. Personal Finance

    What Millennials Should Know About Good and Bad Debt

    Can you tell the difference between good and bad debt?
RELATED FAQS
  1. What role did junk bonds play in the financial crisis of 2007-08?

    Discover the role that junk bonds played in the financial crisis of 2007-2008. The main issue is that toxic housing debt ... Read Answer >>
  2. What's the difference between debt consolidation and debt management or debt settlement?

    Learn about different ways of handling debt when you become overwhelmed, including debt consolidation, debt management and ... Read Answer >>
  3. Why is debt issued in both temporary and permanent forms?

    Debt is separated into two categories: 1) Temporary or short-term 2) Permanent or long-term. Temporary or short-term debt ... Read Answer >>
  4. How do I evaluate a debt security?

    Look at a brief overview of the important factors to consider before purchasing a debt security, such as a corporate or government ... Read Answer >>
Hot Definitions
  1. Racketeering

    A fraudulent service built to serve a problem that wouldn't otherwise exist without the influence of the enterprise offering ...
  2. Aggregate Demand

    The total amount of goods and services demanded in the economy at a given overall price level and in a given time period.
  3. Fixed Cost

    A cost that does not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses ...
  4. Blue Chip

    A blue chip is a nationally recognized, well-established, and financially sound company.
  5. Payback Period

    The length of time required to recover the cost of an investment. The payback period of a given investment or project is ...
  6. Collateral Value

    The estimated fair market value of an asset that is being used as loan collateral. Collateral value is determined by appraisal ...
Trading Center