Understanding the basic concepts of debt
Budgeting has become an important aspect of todays society. If you know how to budget you will be able to make savings and survive in this this commercialized society. Budgeting mainly deals with keeping the expenses less than the total income. The household as a whole benefits from this exercise. Those who are very good at budgeting are capable of saving money even if their incomes are low. This is because they have mastered the technique of keeping their expenses low.
However, there are others who find it difficult to manage their expenses despite having good incomes. The problem sets in when a person fails to make an efficient financial plan and his expenses exceeds his earnings. This creates the need for money. When this happens, a person has no choice but to borrow money to fill this gap. Borrowing a couple of times may sound a normal practice. However, it could be disastrous when borrowing becomes a regular habit leading to serious debt problems.
A person who borrows money from another is said to be in debt. However theris no defined limits on borrowing. A person can have minimal debts or it can reach unassuming heights. It can reach up to millions depending on the credit limits of such person. n many occassions you see people having assets but not enough cash and so they borrow against thair assets. Under this term, the person can be indebted for an amount mess or more than his assets.
As a law, you are not allowed to render services as payment for your debts. This is called undue servitude which is prohibited by the laws of some countries. However, you will come across situations wherein the person who is in debt opts to settle his obligation by rendering his services. Services could be any expertise taht the person may have. He could be talented in a craft like painting and he could pay back in the form of paintings for the creditor. He could agree to provude a specified number of paintings gradually or on an installment basis.
on the other hand, when a person dies, the law has provided for a hierarchy of preferences in the payment of such debts. Of course, payment of taxes to the government will always come first. This is and will always be a priority item as you are not supposed to evade taxes. The second priority for debt payments includes funeral expenses of the deceased and the payment for the wages of people. Other creditors payments will be considered only after this Only after these two expenses are catered to.
By definition, debt is something that the person brrows from another source and is bound to pay back at a specified time. It is really just a simple concept which provides that a person who borrowed something from another is duty bound to pay that debt. However, it has certain complications. It gets complicated with the introduction of other concepts like mortgage, interest rates and other charges. Interest on the principal amount usually doubles and even tripples the amount in certain cases. In many cases you will find the interest amount that has to be paid back is higher than the principal amount.
A person looking for credit can also look out for loans. This can be either secured or unsecured. For secured loans, the debtor needs to provide a security or collateral to borrow. The security or collateral can be anythig that has value enough to repay the loan in case the borrower is unable to pay back on time. This can be a house and lot, a car or any asset of the debtor. An unsecured loan means otherwise.
Most creditors ask for security before granting a loan. This becomes essential because it gives them something to hold on to or to forfeit in case the debtor defaults in payment. When the debtor fails to pay the debt within the agreed timeframe then the security becomes the only option to get the money back. The creditor can foreclose the security or the collateral.
On the other hand, unsecured loan does not give you the chance to run away from your debts. The creditor can still get his money back by filing a case in court. When this happens, the debtor who is unable to pay will be forced to sell off his assets to repay the outstanding loan.
It is a common practise to have debts not only in rich countries but also in third world countries. Even countries have their own debts to other countries. Mostly the thirdworld countries are indebted to the developed countries. These debts usually go on forever because they keep on paying their loan and at the same time ask for new credits as their credit ratings go up. The only difference is that they get project specific loans that they have to spend for that prupose only.
Article by Nakagava Ltd., creator of PiggyBob™, the first truly user friendly personal finance and appointment scheduling software. PiggyBob™ is an extremely convenient tool to help you keep track of your income and expenses, plus a very useful printable calendar to record all important events in your life. Downloand now
