What is Liability?

A liability is a legally enforceable debt or obligation. In household finance, liabilities include mortgage balances, auto loans, student loans, credit card balances, personal loans, medical debt, unpaid taxes, and any other amount owed to a creditor. On a balance sheet, liabilities are subtracted from assets to calculate net worth.

Liabilities are typically classified as secured or unsecured. A secured liability is backed by collateral—a mortgage is secured by the home, an auto loan by the vehicle. If the borrower defaults, the lender can seize the collateral. An unsecured liability (credit card debt, most personal loans, medical bills) has no specific asset pledged against it, so the lender’s primary recourse is collection or legal action.

The CFPB regulates how creditors report liability information to credit bureaus under the Fair Credit Reporting Act. Payment history on liabilities is the single largest factor in credit scoring models, accounting for roughly 35% of a FICO score. High liabilities relative to income increase the debt-to-income ratio, which the CFPB uses in ability-to-repay assessments for mortgage lending under Regulation Z.