The problem of excessive indebtedness in Poland is becoming more common as evidenced by the BIG report for the fourth quarter of 2014, which shows that over 2.2 million Poles have problems with repayment of their obligations, and the total value of debt has already exceeded 11, PLN 5 billion. As Hannah Dingo from the Polish Debt Collection Association points out – there is no loan that could not be repaid, and the key to getting out of the spiral of debt is changing habits related to personal finances. In this article, we will present several effective solutions that will allow all debtors to deal more efficiently and effectively with financial problems.
How does the debt spiral go
We talk about the spiral of debt when the debtor is unable to pay his debts regularly. In other words – all expenses related to liabilities (installments of consumer loans, mortgages, loans, credit cards, etc.) start to exceed the income of the debtor, which results in re-indebtedness in order to repay existing liabilities. The spiral of debt is a very dangerous phenomenon, because it inevitably leads to a financial disaster. At some point the debtor reaches the collector? In which the debtor’s creditworthiness is so low that banks or other financial institutions refuse to grant another loan. With the passage of time and the decrease in creditworthiness, the indebted person is unable to pay off not only capital and interest installments, but even the interest itself on the debt, because their value begins to exceed the financial capacity of the debtor.
A person in the spiral of indebtedness in a critical situation ceases to pay their debts, and the creditor is begging for money. Banks and other financial institutions usually sell debt to the borrower to debt collection companies who are very aggressive about repayment of liabilities. Ultimately, if the debt collection procedure results in a fiasco, the bailiff enters the action. In the worst case scenario you fall into a spiral of debt leads to the loss of all debtor’s assets.
The main reason leading to the debt loop is primarily easy access to cash in the form of various payday loans and other credit products as well as recklessness and low financial awareness of the debtor. Using ad hoc and short-term solutions aimed at covering current liabilities by incurring further loans inevitably leads to bankruptcy. The incurrence of another commitment should always be supported by specific calculations taking into account our financial capabilities and awareness of the consequences resulting from untimely settlement of the obligation.
How to escape the spiral of debt?
The most important role in getting out of the spiral of debt is played by personal finance habits. In the first place, the debtor should realize that he is responsible for the current financial situation. While there are situations in which debtors can not cope with the repayment of obligations due to random factors that are often unpredictable (ie loss of job, illness, accident), in the vast majority of cases, people in the debt spiral themselves are guilty of excessive tendency to borrow (taking further consumer loans even when we can not afford them only to improve our social status, etc.). In connection with the above, psychological factors play an important role in getting out of the spiral of indebtedness. Only after realizing your own responsibility for the current financial situation, you can take further steps to solve the problem.
Another factor in the fight against the debt spiral is confrontation with creditors. Many debtors unable to pay their liabilities avoid contact with financial institutions, which significantly hinders any negotiations in the future in the context of repayment of liabilities. If our financial problems result from random factors, it is worth informing our creditors who can offer us solutions to facilitate the repayment of debt, such as credit holidays, grace period or extension of the loan period (will reduce the monthly loan installment). Of course, at the initial stage of getting out of the debt spiral, one should beware of taking further loans, which can destroy all the difficulties associated with limiting consumption and expenses for the repayment period of excessive indebtedness.
In order to settle our obligations, it will certainly be necessary to reduce current expenditures by limiting consumption. In this case, the simplest solution is to develop our household budget, which will include information such as the amount of monthly income, the amount of regular, monthly fixed expenses, one-off and irregular. The home budget so developed will allow us to create a general saving plan – which is also necessary to generate financial surpluses in order to cover current liabilities. Searching for savings by reducing consumption is the fastest way to get out of the spiral of debt.
Strategy for getting out of the debt spiral
After creating your own home budget and developing a general savings plan aimed at reducing consumer spending, the debtor should focus on developing a strategy to repay his own obligations. Many experts in the field of personal finance present two basic strategies for getting out of the debt spiral. The first of them assumes the repayment of those liabilities which are the highest interest and generate the highest costs related to debt service. In other words, in the first strategy, the debtor should focus primarily on repayment of the liability, in which the interest part in relation to the capital part is the highest (credit cards, payday loans, etc.). The second strategy assumes the repayment of the smallest debts (in terms of amounts) in order to get rid of the next liabilities as soon as possible. The second approach contains a certain motivational factor, as it allows you to see the effects of your own actions already at an earlier stage of strategy implementation.
In terms of a clean economic calculation, the first strategy is more advantageous, as the amount of principal and interest repayments is lower. The fact is, however, that the choice of the first strategy requires a lot of willpower and irony from the debtor. As it was mentioned earlier – you will fall into the spiral of debt largely due to psychological factors, therefore the first strategy is recommended for those whose financial problems are largely due to random factors such as job loss, illness or accident. The second strategy, in turn, is the best solution for people who have fallen into a spiral of debt through their tendency to borrow too much and consumer loans.
It is worth noting, however, that both the first and the second strategy of getting out of the debt spiral assumes allocating additional funds from the repayment of previous liabilities to subsequent ones, which enables faster repayment of the entire debt. For example, if we have four different liabilities, then the first payment allows for faster repayment of the next thanks to additional financial resources that we used to pay off for the first obligation. Such a mechanism is called the snowball, because after paying off the first obligations the rate of repayment of the rest of the debt significantly accelerates making the whole process of getting out of the debt spiral much more effective.
While getting out of the debt spiral, it is worth remembering that the key role is played by the debtor’s approach to systematicity and consistency in regulating his subsequent obligations. Changing your own habits in the context of having your own personal finances is a key element that brings us closer to success.
Banking services that support more efficient repayment of liabilities
There are situations in which the debtor has such high obligations that the possibility of generating additional funds to repay the existing debt may be very limited. In such cases, the solution may be to use a credit holiday or a grace period that allows you to suspend the payment of the entire monthly principal or interest installment or the capital part (in the case of a grace period) for one to even 12 months. Credit holidays or grace period for loan repayment is offered by the majority of banks in Poland, both in the case of mortgage and consumer loans. However, it is worth remembering that after the end of the postponement period, unpaid installments will have to be settled in the future. Most often banks in such situations either extend the loan period (then the amount of the monthly loan installment does not change) or increase the amount of subsequent loan installments according to the conditions previously agreed with the client.
The use of a credit holiday or grace period is a good way to get out of the debt spiral for people who are not able to find additional funds for early repayment of other liabilities. During the postponement of repayment of loan installments, the debtor may pay off other liabilities for lower amounts. After the end of a credit holiday or grace period, the debtor is then able to repay earlier deferred loan installments with greater interest (by overpaying loan installments with financial resources from a repaid liability).
Another solution aimed at reducing the monthly amount of loan installments is a consolidation loan, thanks to which you can combine various loan installments into one. Including a consolidation loan is usually associated with an extension of the loan period, thanks to which the monthly installment decreases, but the total value of interest costs increases, which is why such a solution is not necessarily conducive to a faster escape from the debt spiral.
In 2015, an amendment to the provisions on the Consumer Bankruptcy Act came into force, which enables a much wider group of people to benefit from the bankruptcy procedure. As advocate Mike Hadger stated in an interview with PAP, currently anyone who has not led to his own bankruptcy due to a culpable act or gross negligence may declare consumer bankruptcy. Under the slogans of culpable action and gross negligence, there are a number of different connotations and it is not known until the end in which cases the bankruptcy procedure will be considered favorably by the court and when it will be rejected. In any case, any debtor who fell into a spiral of indebtedness as a result of random factors or being a consequence of an unfortunate accident or incident, as well as an action that he was not guilty of may try to declare consumer bankruptcy. Certainly, such a solution is better than taking further loans to repay current liabilities.