Defeased

Defeased is a term primarily used in finance and law, particularly in relation to debt. When a debt is defeased, it means that the borrower has taken steps to remove the debt from their balance sheet without actually paying it off in the traditional sense. This is typically achieved by setting aside a specific amount of money, often in a trust, that is sufficient to cover the future principal and interest payments of the debt. The assets in the trust are usually invested in low-risk securities that will generate the necessary cash flow to service the debt.

The legal effect of defeasance is that the lender's rights to collect the debt from the original borrower are extinguished, and their claim shifts to the assets held in the trust. This process is often used by corporations to eliminate debt from their financial statements, improve their credit rating, or reduce borrowing costs. It can also be employed in municipal finance, for example, when a government entity defeases bonds to refinance them at a lower interest rate. The key characteristic of defeasance is the establishment of an irrevocable trust that guarantees the payment of the debt, thereby releasing the original obligor from their obligation.