Arrears are payments for goods or services that have not been received. These payments may be overdue or will be due once a product or service has been fulfilled.
Definition and Examples of Arrears
Arrears could be an overdue payment, but not necessarily. Arrears could also mean that a good or service is being paid for after the fact. Businesses can receive arrears—money that is owed and should have been paid earlier—from their customers or make payments in arrears to their vendors. They may also pay employees in arrears, which means employees don’t receive the money they’ve earned until after the pay period.
Let’s say you provide accounting services to a business. If you bill in arrears, you don’t send an invoice or ask for payment until you’ve completed your work. Since it’s your choice to operate this way, the delayed payment isn’t the customer’s fault or considered overdue.
Here’s another example: You own a business and have a few employees. Your employees get paid after they’ve performed their work because you run payroll in arrears. In this situation, your employees’ wages aren’t overdue. You’ve simply decided to pay your employees after the pay period to make things easier.
By paying employees in arrears, employers don’t have to worry about miscalculating or forgetting to consider paid time off (PTO), overtime, and sick leave.
How Arrears Work
In the examples above, arrears are not the result of overdue payments. In some cases, however, they may be. Imagine you use a printing company for your business. If you miss your September payment, the next payment you make in October will be in arrears for September.
There are a variety of reasons you or others may make late payments in arrears. Maybe you don’t receive the invoice. Perhaps you fail to record the invoice correctly or lack the funds to pay. When you receive a bill and don’t send the payment by the due date, your payment is in arrears.
If you pay in arrears, the vendor may increase your interest rate, reduce your payment terms, or lower the amount of credit available to you.
Pros and Cons of Billing in Arrears
- Payment accuracy: When you bill in arrears, you reduce your risk of inaccurate payments. If you bill customers in advance, you’re more likely to issue refunds or multiple bills for overcharging or undercharging.
- Greater flexibility: Some customers will appreciate the flexibility of being able to pay you after you’ve completed a service. This is particularly true if they haven’t worked with you in the past.
- Delayed payments: Since you won’t be paid immediately for your products or services, you may face some cash flow issues. Your cash flow might be better if you require partial or full payment in advance.
- Lost payments: If you don’t receive payment until after you’ve provided a product or service, customers may not pay you. They may forget, miss invoices, or run out of money.
If you do decide to bill in arrears, you can minimize risk by requesting a down payment or only working with customers who have a solid credit history.
What Arrears Means for Child Support
The term “arrears” is also used in divorce law in cases that involve child support. Child support requires the noncustodial parent (a parent who doesn’t have physical custody of a minor child in a divorce) to pay the custodial parent a certain amount of money for child care expenses.
If the noncustodial parent fails to make one or more child support payments, they fall into arrears. When this happens, the custodial parent may take legal action to collect the overdue child support payments that they are entitled to.
Assigned Arrears vs. Unassigned Arrears
The two types of child support arrears include assigned and unassigned.
Assigned arrears refer to unpaid child support payments that will go to the state for financially supporting a child. In this situation, the custodial parent used public assistance because they didn’t receive the child support they need to care for their child.
Unassigned arrears must be paid to the custodial parent directly. They come into play if the custodial parent doesn't turn to public assistance from the government and has the right to all of the unpaid child support.
If the custodial parent would like to forgive child support arrears, they can do so by submitting a waiver. Each state has its own child support laws, so check the rules in your state regarding child support arrears and waivers.
- Arrears refers to the status of payments based on their due dates.
- It’s often used to describe a payment that is overdue or isn’t due until after a product or service has been fulfilled.
- As a business, you can receive payments in arrears from your customers or make payments in arrears to your vendors or employees.
- In family law, arrears in child support refers to past-due child support payments.