Life situations in which current liabilities can no longer be serviced and debts accumulate can occur suddenly as well as without fault.
Excessive consumer behavior is relatively rarely the reason for financial difficulties. Events such as unexpected unemployment, inability to work due to an accident or the loss of the main earner’s income due to a serious illness are much more common.
Often, those affected initially close their eyes to the impending financial collapse.
If they become aware of the seriousness of their situation because unpaid bills are piled up, payment orders are fluttering into the house, seizure measures are initiated and the bailiff auditions, the search for emergency solutions begins.
Many people in precarious financial conditions try to repay existing debts with new loans.
Sometimes they even try to take out new loans just to be able to pay the monthly installments for old debts.
Apart from the fact that additional borrowing on your own is almost impossible, it never leads to success. Additional loans to repay existing debts, i.e. to settle debts, almost always lead directly to the debt trap.
Debt rescheduling unsuitable
Every now and then one reads the advice to pay off debts with a debt rescheduling. Such advice is often not very helpful.
A remaining debt of $ 10,000 is owed. Since no payment was made despite reminders, the creditor obtained a title.
The judgment or the enforcement order does not only refer to the remaining debt. Ancillary claims that have arisen up to that point are also included in the enforcement. These are, for example, accrued interest and court costs.
Let us assume that this amount is $ 2,000, a realistic amount if legal proceedings have been carried out.
The debtor therefore needs at least $ 12,000 to “reschedule” and offset the original loan along with costs.
So the whole action didn’t bring a penny in debt reduction. Instead, interest and repayments are now to be made on a higher loan amount.
Apart from the lack of economic effect, debtors of titled claims will hardly have the opportunity to take out a debt rescheduling loan.
You need another person of sufficient creditworthiness to take care of the borrowing for you, alone, without the debtor appearing to the credit bank at all.
For whom there are titled claims, he has a miserable credit rating.
If he appears in front of a bank, the route of a guarantee or co-signing by a third party is only chosen, this only complicates borrowing and leads to worse conditions at best.
But who will be willing to take out loans for another person in such cases? As a rule, they are relatives, primarily the spouse.
It is easy to imagine which unpleasant situations can arise from this.
Refinancing to reduce monthly credit
A debt rescheduling measure is to be assessed differently in order to gain financial scope by reducing monthly loan installments.
Here too, the debt restructuring itself does not lead to the repayment of the debt. Only the monthly charge is reduced. This is illustrated by two examples:
In addition to an installment loan, there is also a negative balance from a revolving credit card. In addition, the discounts have been exhausted. The borrower is not insolvent. However, he can no longer completely cover the interest charges from the credit card balance and the overdraft facility.
It is advisable to reschedule the credit card balance and the overdraft facility into an installment loan with the shortest possible term. If necessary, the existing installment loan can be included, provided the new loan offers significantly more favorable interest rates.
The situation is somewhat different if, for example, the rates for a home loan exceed the financial capacity of the borrower.
In such a case, an attempt can be made to refinance into a loan with a longer term (fixed interest period) if rescheduling into a cheaper loan with the same term alone is not sufficient.
By extending the term, the monthly charge is reduced. However, the total cost of the loan increases. An extension of the term alone will never pay off debts.
Debt restructuring measures to improve the financial scope are generally no longer feasible if a title is available.
So they have to be addressed in time. A new debt rescheduling loan does not necessarily have to be taken out with another lender.
Many banks declare themselves willing to extend the term and thus to reduce the monthly loan installments if their customers experience financial difficulties.
Debt settlement instead of credit to repay debt
Those who have got into financial difficulties and are simply unable to service the commitments they have made must not bury their heads in the sand. The earlier he tackles debt regulation, the better.
Of course, he can take his financial matters into his own hands. But in the vast majority of cases this is pure theory. Very often, over-indebted people are in too weak a position to be able to negotiate with creditors.
We recommend going to a debt counseling center – as early as possible. An alternative is to consult a lawyer who specializes in debt settlement.
Tip: Show yourself already informed during the first visit to the debt regulator and take all documents about your liabilities and income with you.
The more specific information they can provide, the faster the necessary measures can be initiated.
Here are some points that play a role in debt settlement.
Inventory: at the beginning there is a cash descent
Compile all income and expenses from the past twelve months. In doing so, estimate the costs for individual positions in household management: food, clothing, leisure, etc.
Don’t forget the costs that are not monthly, but yearly or at other time intervals.
The debt regulator will want to discuss with you both a reduction in expenditure and, if necessary, an increase in income.
For example, he will suggest replacing branded products with private labels, canceling some insurance contracts or looking for cheaper insurance solutions.
Another proposal can be to waive long-term obligations (for example, cell phone contracts). Or it is suggested to look for a cheaper provider of telecommunication solutions.
In addition to a reflection of buying behavior and spending behavior, the debt regulator may also discuss ways of increasing your income with you, for example through part-time jobs.
The specialist will certainly recommend that you keep a precise record of all income and expenses, and in this way keep the savings targets closely under control.
With the documents and information provided, you enable the debt regulator to negotiate with your creditors.
It can be about setting a quota of the respective residual debt with which every creditor has to be satisfied.
Or it is agreed to extend or defer individual debts. Of course, both are also possible.
If necessary, a payment schedule is set up with time specifications, after which the liabilities are settled.
The debt regulator will probably first try to reach an agreement with “important” creditors. Examples are open receivables from energy supply contracts or from house financing.
In the context of debt regulation, rescheduling measures and new loans can be useful in individual cases.
If an agreement is reached with the creditors, private bankruptcy can be averted.
Conclusion: debt reduction instead of new loans
Borrowing to pay debts is not used to reduce debt. On the contrary: this usually increases the liabilities.
Debt restructuring is also not a means of reducing debt.
They are useful if you can save credit costs because the loan to be taken out for the remaining debt is cheaper than the original loan.
Debt restructuring is also an option if it can reduce the monthly financial burden. In addition to taking out a loan with lower interest in the amount of the remaining debt, this can be achieved by extending a term.
However, the prerequisite is that the borrower can easily pay the lower new installments.
Debt restructuring measures alone never reduce the debt burden.
If the monthly charges, possibly reduced by rescheduling, can no longer be covered from the income and there are no cash reserves, the conditions for over-indebtedness are met.
In such circumstances, it is advisable to get professional debt advice immediately before the debt grows completely over your head.
But be careful with debt advice or debt restructuring from the Internet. Often the providers cannot carry out a real debt restructuring, but try to accommodate overpriced loans.
Debt counseling centers can be found on site. They are offered by charities, consumer centers and sometimes municipalities.