Understanding Debt Series: Part 2 Some Real Life Examples of the Causes of Debt

by admin on 1 September 2010

This is part 2 of a three part educational series on debtsecrets.co.uk about Understanding  Personal Debt. These articles are aimed at professionals working  in debt advice / debt advocacy services or anyone interested in personal debt.  Part 1 which  discuses the causes of a personal debt crisis is available here.

These are some real life case histories of people with a debt problem (the original names and some details have been changed to protect the identities of the individuals involved)

Example 1: Debt problem caused by sudden reduction in income

Anne, a single mother and cleaner in a hospital, rings me to try and help her with her debt problem. She has 15K of debts and she has stopped paying her rent. Her outgoings are £1,550 a month. Recently she has had her hours reduced causing her income to drop to £1,050 per month.  She is therefore living beyond her means and can no longer make the minimum payment on her credit cards of £120 a month.

Example 2: Debt problem caused by poverty

A young man, Michael, rings me. He lives with his mother and has a part-time job giving him an income of 200 a month. He has 14,000 in debts in a mixture of store and credit cards. He pays a £100 a week to his mother who is on disability allowance. Further questioning reveals that the cause of their debt problem is they are simply do not have enough to go around and have been using credit to help them afford the basics.

Example 3:  Debt problem caused by Depression/Illness and Unemployment.

Pat, a consultant, is 45 taking extended time out of work as he is suffering from depression. He has unsecured debts of over 90K. Monthly outgoings of 2K and income of 4K. In normal circumstances he could tolerate this level of debt. However, due to his extended absenteeism his full salary of 4K will only be paid for two more months.  Based on his monthly budget there is little room to maneuver and his outgoings can be minimized to not less than 2K. He expects not to work in the long-term due to his illness.

Example 4: Debt problem caused by poor financial management

John is a policeman and Anne is a teacher. They have four children. Their total monthly net earnings are in excess of £5,000. They have a house (no equity) and a mortgage of £480K which costs them £2,800 a month. Their outgoings including food, utilities and their two cars are £3,200 a month. They are therefore overspending by 1,000 a month. However, they have £120K in unsecured debt in the form of credit cards, bank loan and store cards. This is costing them an extra £800 in minimum payments. The debt is continuing to grow.

The cause in this case turns out to be poor financial management. The couple have overspent heavily for years to maintain a lifestyle that is simply beyond their means.

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