Consequences of debt and ways out
Around 55,000 people use debt counseling services in Austria every year. They are people of different ages and backgrounds – what they have in common is that their debt has become worrisome and a burden. What are the potential social, health and economic consequences of debt? And what should you do when you have payment difficulties? What happens in the event of overindebtedness? What does private bankruptcy mean, and what are its consequences? For more information, read on.
Consequences of debt
The consequences of debt can be varied and stressful, regardless of the actual amount of debt. We can group them in three categories: social, health and economic consequences.
Social consequences
Debt can become a social problem when you have borrowed money from a friend or someone else in your social circle. If you repeatedly forget to pay back the money, or if you are unable to do so, the quality of your friendship may suffer. The higher the amounts borrowed, the greater the burden on your friendship may become. Major debt problems often lead to people even withdrawing from social activity out of shame.
Health consequences
After the joy about a new purchase or investment has worn off, debt can become worrisome and cause mental and even physical problems, especially if the debt and the perceived financial burden are high. Rising worries can manifest themselves in the form of anxiety and sleep problems. This increases the risk of mental illness, such as depression, which often goes hand in hand with physical complaints, and the feeling of helplessness grows stronger and stronger.
Economic consequences
Taking out a loan can make financial sense when you want to make important investments. If a borrower pays back their outstanding debt regularly, on time and as agreed, their creditworthiness (credit quality) may even improve. This is because the borrower shows that they are able to meet their financial obligations. Still, it is crucial to factor in the costs associated with debt before taking out a loan. Depending on individual arrangements, the borrower has to pay loan costs like interest, fees and charges. This is why it is usually more expensive to take on debt than to use the money you already have. Also, the repayment of outstanding debt can tie up a considerable amount of your disposable income, thereby negatively affecting your liquidity. Moreover, the level of inflation should be taken into account. When inflation is high, the real value of outstanding debt falls. The borrower can benefit when the agreed interest on a loan is lower than inflation.
If a borrower has problems paying back their loan, their creditworthiness may deteriorate. As a result, they may no longer have access to certain transactions and services, for example certain types of credit or mobile phone contracts or even payment options like “on account”. If something unforeseen happens (loss of income, sickness, repairs or anything else resulting from the risks associated with debt), the borrower may get into trouble paying back their debt and, eventually, enter into bankruptcy. This means that the borrower does not have (or no longer has) enough money to make payments on time. Such payments may include outstanding bills and reminders, payment obligations for subscriptions and all kinds of installment arrangements including loan installments at the bank. The big danger lies in the debt burden growing further quite quickly, as a vicious circle of additional interest, fees and other cost evolves. Creditors have various options for getting the money owed. If a borrower fails to make repayments as agreed, the creditor may call the outstanding balance due. This means that the creditor requests the borrower to pay the outstanding amount within a specified deadline. After that, the creditor may involve a debt collection agency or take the matter to court to implement a wage/salary attachment. All this makes the debt burden grow further.
The following table illustrates how a EUR 8,000 loan can turn into a debt burden of EUR 15,000 within three years:
| Loan/costs/debt | Amount in EUR |
|---|---|
| Original loan | 8,000 |
| Reminder fees | 300 |
| Debt collection agency | 2,500 |
| Interest, default interest | 3,000 |
| Legal costs (lawyer, foreclosure proceedings) | 1,200 |
| Debt after three years | 15,000 |
In situations like this, the debtor concerned is forced to significantly cut back on spending. Reminders, legal action and wage or salary attachment may cause high additional costs. Eventually, the economic consequences can be foreclosures or even private bankruptcy.
Behavior in the event of payment difficulties
Due to the consequences of debt that have already been mentioned, it is crucial that people in payment difficulties face up to their situation and take action as quickly as possible before the debt burden rises even further. There is no point in postponing financial decisions, pretending the problems do not exist. Rather, creditors should be contacted immediately to avoid getting trapped in a negative spiral of rising costs. Similarly, it is important that the debtor gets an overview of their income and expenses and outstanding debt. This should serve as the basis for developing a plan for paying the debt, ranked by importance and deadlines.
Debtors may also want to contact budget and debt counseling services, who can provide assistance and support.
Tip
- Budget and debt counseling services provide assistance and support to anyone who needs help with their debt. They are reliable and provide their services free of charge, helping debtors to help themselves. Debt counseling agencies do not provide financial support or guarantees.
Options when you are no longer able to make payments
In the event of overindebtedness or an inability to pay, the debtor should act quickly, either on their own initiative or together with a debt counselor, to find a solution to their debt problems. In a first step, the debtor should put together all the loan contracts, bank statements, payment reminders, court documents, etc. and make a list of all outstanding debt and creditors. Also, the debtor should prepare an overview of their income and expenses. During the consultation, the debtor and the counselor first discuss the debtor’s current situation based on the overview of income and expenses (budget plan) and the list of all outstanding debt and creditors, including deadlines. Next, they will look into the financial situation in order to find possible ways to improve the debtor’s income situation and generate earning additional income as well as reduce spending, if possible. This will be used as the basis for a detailed debt repayment plan, setting out how much debt can be repaid over what period of time.
In principle, there are two ways to solve debt problems. First, under an out-of-court settlement, an attempt is made that the debtor prepares a plan for future payments and offers it to their creditors. If all the parties involved accept the plan and the debtor complies with it, the debtor can achieve a durable solution of their debt problems. If the debtor and creditor cannot agree on out-of-court settlement, a solution through private bankruptcy (debt settlement procedure) will be sought.
Private bankruptcy
The colloquial terms personal bankruptcy or personal insolvency refer to the so-called “debt settlement procedure”. The objective of such a procedure is to give people who are overindebted the opportunity of a fresh financial start. Under private bankruptcy proceedings, the debtor pays back amounts they can afford over a specified period of time. During this time, the debtor is obliged to economize and lead a modest lifestyle not allowed to take on new debt. If there is a payment plan and the debtor makes regular payments as agreed, the debtor is freed from their debt after the conclusion of the bankruptcy proceedings. The procedures and legal provisions applicable in private bankruptcy proceedings are very complex. Therefore, it is recommended that debtors seek support through debt counseling.
The opening of bankruptcy proceedings has several consequences: First, interest payments and any foreclosure proceedings against the debtor will be halted. Information that bankruptcy proceedings have been opened will be published in the Austrian legal notices database. In addition, the court will also inform the creditors, the employer and the banks concerned. The debtor’s assets will be liquidated by court. After the successful conclusion of private bankruptcy proceedings, which usually last three to seven years, there will be a discharge of residual debt. The creditors will receive part of their claims and have to waive their remaining claims.
