This is part 3 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 2 which gives examples of the causes of a personal debt crisis is available here.
Financial Effects of a Personal Debt Crisis:
One of the most sinister effects of debt in general is how the compounding of high interest loans can work to quickly multiply the original debt. This can lead to a scenario where the debtor is “robbing Peter to pay Paul”, in other words, taking out more loans to cover the interest on existing loans. Such a scenario cannot last for long and will result in bankruptcy and the loss of any assets which may include the family home. The debtor may have their name publicized and even runs the risk of imprisonment. Future access to retail sources of credit will be restricted leading to an inevitable dependence on money lenders for those on low income. In any case, the long term effect of excessive consumer debt is ultimately a reduced standard of living for people of all incomes.
Personal and Health Effects of A Personal Debt Crisis:
Short term solutions to money problems can lead to extreme situations where people economize to such extent that they sacrifice food or fuel. There are also a myriad of malign personal effects of consumer debt not least the severe stress to the individual and their families which can even lead to depression or psychiatric problems including suicidal tendencies, illness, addictions, relationship difficulties or family breakdown.
Social Effects
No mention of the effects of consumer debt can be complete without considering it from the wider viewpoint of society as a whole. The cost of poverty and consumer debt is increased social failure in its various manifestations of social and economic disability, physical/intellectual disability and cultural disability.
Some examples of the effects of consumer debt from my previous experience of debt problems
Example 1: Debt problem caused by sudden reduction in income
Unless Anne can increase her working hours she is likely to experience an immediate reduction in a standard of living. However the effect shouldn’t be as bad as the figures suggest as she is working under 24 hours and has a child so she will be entitled to income support. There is also some leeway in her expenses as she will also be able to claim a credit towards council tax benefit. However the stress of her debts has clearly affected her.
Example 2: Debt problem caused by poverty
The young man represents a vulnerable demographic of people on low income who go to desperate lengths to make ends meet. The effect of his low income has brought him to a vicious circle situation where he was borrowing on one credit card to pay another. It has also brought tension in his relationship with his mother. He seems to be unaware of his social welfare entitlements and needs to be shown how to access them. He needs to communicate his situation with his creditors and explain his situation to them. His credit rating will be impaired for the next 5 years making him at risk of resorting to moneylenders.
Example 3: Debt problem caused by Depression/illness
It appears that Pat’s depression predates his debt problem but from how stressed he comes across it appears as if the effect of his money problems will exasperate it. This example clearly demonstrates the link between poor health and debt both as cause of debt and its effect.
Example 4: Debt problem caused by poor financial management
The effect on this family of their debt problem will be that they will have to be part of a debt settlement which will result in an austere family budget and consequent dramatic change in their lifestyle.