What is personal debt?

eCollect support team

A personal debt implicates the liabilities of a debtor as an individual. Such obligations derive from: purchase of goods and services, and they are known as bad debts; or from borrowing an amount for important and needed objects or services, i.e. paying for education, purchase of home, car, medical and hospital expenses, etc. (known as good debts). Falling into debt is not only connected with financial difficulties but also with stressful situation for the debtor. A consumer not always intends to leave his default payments behind. Sometimes he is not financially capable of covering the debt amounts. If the past-due payments have arose out of unpaid hospital bills, education taxes, or unexpected income decrease, the debtor will have to look for professional debt management help or to organise his income and expenses on his own. Falling into debt is a difficult situation, but there are a lot of legal ways to get out of a personal debt. Some creditors might even agree to forgive part of consumer’s debt or change his monthly interest fees, so he can afford to perform payments on the base of his monthly income.

Personal debt help

In many countries there are charity organisations, which offer personal debt advise for free (e.g. for England and Wales:
). Today there are companies, which provide professional debt management plans and will negotiate with the lenders for partial forgiveness of the debt amount or for freeze of individual’s interest fees. It is also possible that more than one debt is united into one single liability with lower monthly interest, which is known as debt consolidation as a worldwide definition. In UK and Wales the consolidation of a personal debt can be done through court, and in such case the process is known as an Administration Order (ext. link 4).

Personal debt help includes involvement of different debt reduction programs, like debt relief order; Individual Voluntary Arrangements, which are used in United Kingdom & Wales; debt reduction and consolidation programs; debt settlement; and bankruptcy as a last resort option.

A consumer can evaluate his debt expenses by preparing a monthly plan for budget, including his total wage income and expenditures for household bills, debt interest, etc. By following this budget plan, the individual will spend less and therefore increase his income. This strategy is very important not only for unsecured personal debts but also for secured loans, especially when the collateral is consumer’s property. If the debtor falls behind with his secured personal debt payments, he will receive a repossession order and his home will be forcefully seized.

Sometimes a consumer needs help not because he cannot adhere to deadlines, but because he has been harassed by creditors, DCAs (Debt Collection Agencies), debt buyers, debt attorneys, etc. There are different organisations, acts and legislations, regulating debt collectors’ actions in order to preserve personal debt consumers’ rights.

During a debt recovery process the consumer will receive a letter in writing from a collection agency, stating that the individual has certain monetary obligations to the creditor. But if the indebted subject does not owe such amount to the lender, the consumer should send a debt validation letter. If the collectors continue harassing the second party (debtor) in connection with this particular default, the individual should look professional advice and file a complaint to a consumer protection organisation.

Avoid falling into personal debt

According to the statistics’ research, carried out by Ales Chmelar (researcher for CEPS/ECRI- the Centre of European Policy Studies and the European Credit Research Institute) household and personal debt increases every year (see ext. link 5).

Managing a regular budget scheme is the first step towards avoiding personal debt and is also efficient when a consumer has already fallen into a late payment situation. This can be done via various budgeting tools like the debt-to-income ratio formula or by using different savings calculators (e.g.
). If an individual has borrowed an amount, it is vital not to fall behind with his monthly liabilities towards the lender. Even if the monetary obligations are more than one, a person can avoid getting into past-due payments by managing his monthly income (wage, etc.) and his monthly expenses (debt interest, household bills, etc.).

Another option for preventing late debt payments is not taking over-sized loans, especially when the debt is secured and followed by a material guarantee (e.g. mortgage loan with estate collateral). If the person is already in a bad debt situation, he should consider evading purchase of unnecessary or redundant goods/services, which can immerse consumer’s financial crisis.

An individual should estimate whether or not he really needs to borrow an amount. If an “emergency fund” is affordable, a consumer should use his savings, rather than applying for a loan. If possible, a debtor should limit or stop the usage of credit card payments, when he has already borrowed an amount.

Used literature & external links