Definition of Circular Debt

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Circular debt is a situation in which a string of debtors and creditors exist in a fashion such that the net final creditor in the string is indebted to the first creditor. Every member is both a debtor and a creditor.

Net Balance of Zero

A simplified form of a circular debt would involve, for example, three individuals. Individual A owes $100 to individual B. Individual B owes $100 to individual C. Individual C owes $100 to individual A. The net balance of all debts between the three individuals is zero.

Reconciled Positive Balance

Using a three person example, person A owes $100 to person B, who owes $50 to person C who owes $100 to person A. This circular debt may be reconciled such that C owes B $50 and the remaining debts are canceled.

Linear Debt Chains

In order for a circular debt to exist, there must be a closed loop between all parties. For example, party A owes party B and party B owes party C, but party C does not owe either A or B. This situation is sometimes incorrectly referred to as a circular debt, but is more properly termed a "linear debt chain" or a "linear chain of receivables."


About the Author

Jared Ruplinger is an entrepreneur and journalist who has been writing since 1995. He has worked in and written about fields ranging from world travel to e-commerce and manufacturing processes. He has also written for the "Catalina Islander" newspaper and other publications. He holds a Bachelor of Arts in anthropology and Japanese.

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