negative amortization

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“Negative amortization,” or “deferral of interest” is used in the context of a bankruptcy plan of reorganization under Bankruptcy Code, 11 U.S.C.A. § 1129 (b)(2)(A)(i)(II).   It refers to a provision where part or all of interest on a secured claim is not paid currently but instead is deferred and allowed to accrue, with accrued interest added to principal and paid when income is higher. When a bankruptcy plan calls for “negative amortization,” the plan is providing that interest payments on an existing debt be added to the principal, and paid at a time when the debtor enjoys greater income or sells the collateral.  The extent of negative amortization depends upon difference between accrual rate (or overall rate of interest to be paid on claim) and pay rate (or rate of interest to be paid on monthly basis).  

[Last updated in July of 2020 by the Wex Definitions Team]