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Debt

A debt is a certain past-due amount owed by a second party (consumer, debtor) to a first party (creditor, lender) and is due by a written contract. It represents the failed obligation of a consumer to pay back a monetary sum, before a specific deadline, under an agreement. Debts can be recovered either by a private DCA (Debt Collection Agency) hired by the original creditor, or by creditor’s internal financial departments. Collection agencies aim to recover any type of outstanding receivables and bad debts in order to return the amount due to the first party (the creditor) who owns the default. Such default payments occur when a consumer acquires a monetary loan in order to use it for personal needs (purchase of goods, services, etc.) or to finance capital purchases, equipment, etc. (for business corporations). In the first case the default falls under the name “individual” and in the second is known as business to business, or B2B default. A subject is considered as fallen in debt, when his invoice has become overdue and the payment- late. A late payment is considered as such when the period for returning the amount, specified in the contract, has passed. This is usually between 30 and 60 days from the purchase invoice.

Debt description and groups

Overdue payments are divided into several large groups. Depending on the type of debtor debts can be consumer or commercial. Consumer overdue payments appear after personal loan for purchase of goods and services; unpaid memberships, car loans, medical bills, etc. Under the definition commercial or B2B defaults fall all types of company loans, where the debtor and the creditor are both business organisations. Usually business-to-business loans are connected with lending larger monetary amounts.

A default can also be secured and unsecured. The secured defaults are rarely chased by third-party DCAs (Debt Collection Agencies), as they are always followed by a material collateral or a guarantee. When an indebted subject signs a contract for secured loan, he also pledges a material property: estate, car, personal belongings, etc. Unsecured defaults are less safe and bring no material guarantee to the creditor. However, each debtor is legally bound to pay back the loan amount in full before a certain dead line. 

If the subject of debt’s country differs from creditor’s permanent location, then the debt is considered to be foreign. To collect such debts, the lender usually hires specialised international credit collection agencies. If creditor’s and debtor’s countries of residence are the same, the default is known as “local”. 

Reasons for falling in debt & preceding loan types

 

debt

There are different factors, defining whether a consumer can fall in debt or not and how he can become an indebted subject. According to various researches, the most common default reason is mortgage, credit card purchase and student loan. In America, due to 2014 default statistics (source: http://www.nerdwallet.com/blog/credit-card-data/average-credit-card-debt-household/), April 2014 defaults’ statistics generated around $33,000 from education loans, approximately $154,000 for mortgage defaults and almost $16,000 from credit card purchases. Student loans derive from rise of education taxes and fees. As young people in college or university have very low or none income, the loan automatically becomes a default amount, also called “good debt”. Good debts are called so for the reason they have not appeared from a purchase but were needed for education fees payment.

Falling into a medical loan situation is another large default’s section. It can evolve from unpaid health insurance, hospital fees and taxes, etc. This is the second representative of “good debts”. Again, such loans are necessary not for purchasing goods and services, but usually concern a health situation. A medical default most often derives from the financial inability of the consumer to cover the default amount, due to unexpected expenditures. 

Other forms of unexpected expenses or sudden loss of income can be a divorce, relative’s death, job loss (redundancy), etc. However, probably the most common reason remains the overspending issue, the so-called “poor monetary management”. As credit cards have become very common and convenient payment methods, a subject can easily lose track of his current balance. There are a lot of companies who offer management plans and the preceding credit management plan. Such organisations operate in return of a fixed payment, but are usually a good option for debtors, who cannot control their outcome. These propose personalised credit and debt management payment plans to ease the default payment process or to forerun future falling into debt.

A mortgage loan is another very common reason for debt situations. The mortgage default is a type of secured loan, as it is followed by a collateral- a material guarantee for receiving a loan, usually an estate property, car, or other valuables. 

Used literature & External links

  1. http://ycharts.com/glossary/terms/financial_debt
  2. http://www.accountingtools.com/definition-debt
  3. http://www.womensfinance.com/wf/manage_debt/types.asp
  4. http://www.cleardebts.co.uk/causes_falling_debt.html
  5. http://en.wikipedia.org/wiki/Mortgage_loan

Keywords for Debt

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Author: Helene Müller
Helene Müller has been providing Debtor Support at eCollect since 2013.