How do debts arise?
Certain life situations make it necessary to pay off debts. When this can happen and what options consumers have when paying off debts are explained here.
In everyday language, debts are equated with liabilities. This refers to a repayment obligation of natural and legal persons towards third parties from whom they have received a consideration. Third parties, the so-called creditors, can be individuals, institutions, banks or companies.
If a payment obligation cannot be met — that is, the debt is not paid — the debt can accumulate through additional costs such as reminder fees, interest and compound interest or attorney and court costs. A continuous increase in costs without the consumer paying off the debt can quickly lead to a debt trap.
Taking on debt and paying off debt: the reasons
The occurrence of debts for private individuals can have different causes. For example, mobile phone, telephone and internet contracts or maintaining a vehicle can quickly lead to high costs.
Especially the first own apartment can lead to high burdens and subsequent bottlenecks when it comes to paying off debts. Suddenly rent, utilities and living expenses must be managed independently. The apartment also needs to be furnished and leisure activities should preferably not suffer. Some people also find that a rushed purchase of a flat or house — especially without equity — becomes too much to handle. Paying off debts then becomes an obstacle.
Overall, dealing with money in everyday life often proves difficult. Living beyond one’s means — purchases for oneself or others that one cannot actually afford — often lead to payment difficulties. Consumers then often have trouble paying off their debts.
In general, it is easy to lose track and payment obligations can no longer be met. Drops in income such as earnings losses from changing jobs, short-time work or unemployment can also cause payment difficulties. But major life events such as separation or divorce, illness, addiction, accident and the death of a partner can also contribute to the accumulation of debts.
Options for paying off debts
To be able to pay off debts, the first step is to get an overview. All documents should be sorted and financial possibilities reviewed. Creditors should then be contacted with an appropriate offer before they take action themselves and additional costs arise — such as attorney or court fees and interest — or even approach the debtor with an account or wage garnishment. An out-of-court agreement for paying off debts can save significant costs. This is usually also in the interest of creditors, as they too are interested in a quick resolution.
A commonly used option to pay off debts is installment payments. Here an agreement is made to repay the debts in smaller amounts over a longer period. An installment consists of the repayment of the debt (principal) and the interest that continues to accrue. Interest is calculated until the final installment, which is why the total amount repaid at the end is higher than the original claim. Usually payments for paying off debts are made monthly in equal amounts. Less commonly, repayments are agreed in such a way that the total debt must be paid at a specific point in time.
Paying off debts with a settlement payment
With a settlement payment, the total debt is only covered in part. The debtor must pay that part in one sum by a specified date, and the remaining sum is then waived on a private-law basis. This must be contractually agreed in advance between the debtor and the creditor.
In principle, a settlement payment can be made with each creditor individually as well as collectively. Both the debtor and the creditor can offer a settlement payment. This can be useful if the debtor can make regular and reliable payments but the duration of repayment would be too long due to low installments. A settlement can thus lead to the debts being settled as quickly as possible, which is also in the interest of the creditors.
Paying off debts with a payment deferral
A deferral is an agreement between the debtor and the creditor to postpone the due date of the claim beyond a certain point in time. This is useful, for example, if the debtor is temporarily unable to pay but can assure the creditor that they will be able to pay off the debt at a later date.
A deferral can be limited to a certain date or tied to a terminating condition. For example, the debt can become due before the agreed date if the debtor unexpectedly has sufficient financial means available.
Paying off debts with a loan: debt consolidation
A loan is the provision of money for a certain period. The borrower pays not only the principal but also interest as compensation for the lender's relinquished use.
Typical forms of credit are installment purchases, bills of exchange, deferrals and loan agreements. Loans are most commonly used, where fixed repayment payments are agreed. A loan can be particularly attractive for debt consolidation. In this way, all payment obligations to various creditors can be combined and settled. The total debt is then repaid monthly with only one installment instead of multiple installments to different creditors.
Additionally, one can benefit from more favorable current loan conditions such as lower interest rates and repayment rates, and the debtor’s creditworthiness may be restored in the future.
Debt consolidation is especially worthwhile when the amount of debt requires repayment over many years, which means that interest continues to accrue and the debt hardly decreases. Debt consolidation can therefore save further interest.
Personal insolvency
In extreme cases, personal insolvency (consumer insolvency proceedings) is the last option. It is suitable when private individuals can neither arrange a settlement nor installment payments, i.e. are completely unable to pay. It is also an option when it is already foreseeable that over-indebtedness is imminent.
In insolvency proceedings, all creditors are treated equally and receive payments according to quotas that relate individual claims to the total debt. All creditors must agree to the insolvency, because the likelihood that they will receive their full claim is very low. In most cases they receive only a fraction of the claim.
Debts are repaid partly with the proceeds from assets that can be enforced in foreclosure and partly with the garnishable amounts according to the table of reasonable subsistence amounts over a period of 6 years. After that, the debtor is released from the remaining debt and is debt-free. This is also an option for completely penniless debtors, as even the procedural costs can be deferred.