Debt: more and more women are affected
Debt is not a pleasant topic. But being well informed about debt helps you navigate this crucial topic if you are affected by it. Let’s review the statistics: The average German has about 30,000 € debt. Overall, 10% of the German population is in debt. Or: 6.9 million Germans over the age of 18 are (Debtor Atlas, 2017). The trend is “positive”: more and more people take on (small) loans to finance their short-term wishes. In comparison to last year, there are now 65,000 more debt cases. The debt-equity ratio per person however has slightly decreased.
You may think that debt is not an issue for you. It does not affect you.
But one can fall into the debt trap much quicker than expected. One of the reasons could be failed commercial independence.
One can stumble into the debt trap faster than expected - for example, as a result of a failed commercial independence. And: more and more people between 30 to 39 year old are in debt. Some of our readers as well as Caroline (my co-founder) are part of that age group!
Given that debt is such an important issue, we dedicate three articles to it:
Part I - Debt - More and more women are affected
Part II - Debt - Why you should be interested in the Schufa Score
Part III - Debt - Get out of debt!
Who exactly is in debt?
Two groups are increasingly indebted: the 30-39 year olds and the group of 50 year olds (and older). In the group of 50 year olds (and older), in particular those over 70 years are affected. Single parent women and single men are disproportionately affected by excessive indebtedness.
Indebtedness, excessive indebtedness and personal bankruptcy - what are the differences?
Debt exists when there are small sums of debt. These include credit card debt, consumer debt, purchases made by installments, (bank account) overdrafts or a mortgage. Debt exists when you have multiple loan commitments or debts that cannot be covered by your monthly salary, but by existing assets (e.g., home loan). In these scenarios, you would be able to repay your debts by liquidating your assets.
Excessive indebtedness occurs when a person cannot make agreed upon installment payments for at least three months without jeopardizing basic payments such as rent, electricity, utilities and living costs. In this case, a person’s existing assets cannot cover the debt. If neither revenue from potential savings nor from a part-time side job exist, one should visit a counseling center for debtors to address the illiquidity.
What are the reasons for excessive indebtedness?
According to the Federal Statistical Office, the most common reasons are:
Illness, addiction, accident
Separation, divorce, death of the partner
Failed commercial independence
In the long-term, excessive indebtedness can lead to bankruptcy. We’ll discuss this in more detail at the end of this article. We recommend to pay off debt as quickly as possible. Do not build up savings in parallel.
What are the causes of debt?
According to a study by Smava, debt is often taken on to pay for a car (loan), furniture, electronics or household appliances. Which debts are typical? According to a study by ING-DiBa (2014), most debts are:
20% personal loans
18% bank account overdraft
7% credit cards
7% debt to family / friends
Did you also notice that the cost of (bank account) overdraft is almost as much as the cost of personal loans? In general, overdraft interest rates are very high, followed by loans and mortgages.
Which loans occur for what?
Consumer credits / installment loans serve to fulfill consumer wishes
Loans for a specific purpose, such as car loans, are usually backed by a collateral, which lowers the interest costs. The annual interest rate amounts to 4.5%.
Mortgage loans are usually insured with a mortgage and hence more affordable financing for real estate purchases exist (about 2%)
Very expensive debts are (bank account) overdrafts, followed by loans and mortgages. Overdrafts and revolving credit cards are often used to cover unexpected consumer spending. When you use a credit card, you can pay up to 15% interest rates per year. (Bank account) overdraft interest rates can amount to up to 12% interest rates per year. Stiftung Warentest, a German consumer service, recommends comparing interest rates: for bank overdraft interest rates vary between 8-13%. Restructuring debt is also worthwhile (for example, from an overdrawn account to a loan). According to the German daily FAZ (Frankfurter Allgemeine Zeitung), one can pay up to € 763 of interest rates per year for a credit line of € 2,000 (with a € 50 minimum monthly repayment, and the credit duration amounting to 45 months) - in comparison, an installment loan would cost € 218 per year.
Stay away from (bank account) overdrafts and credit card debt!
Loans and mortgages present "good" debt.
As promised, our brief digression regarding personal bankruptcy: If you consider declaring private bankruptcy, consider the following steps:
Achieve an amicable settlement with your creditors - if no agreement has been reached, this must be confirmed by an attestation (for example, by a suitable debt counselor, notary, solicitor or accountant). It must not be older than six months
File a petition to the district court
As debtor, submit a debt settlement plan which was accepted by at least 50% of the creditors to the district court
It is only then that a provisional procedure is initiated, during which the court examines whether insolvency proceedings can be started. Criteria for the decision are: insolvency, impending insolvency or excessive indebtedness. In addition, it is determined whether the insolvency assets suffice to cover the costs of the proceedings. Note that the procedure can be rejected if e.g. the insolvency estate cannot cover the legal costs; in this case there an indictment for bankruptcy can occur
When the proceedings are opened, an insolvency administrator is appointed. The insolvency administrator distributes the insolvency assets to the debtors, including the pledging of assets and property. If an insolvency plan is presented, the procedure can be shortened. However, this requires a payment from a third party (as the insolvency assets cannot cover this).
Once the procedure has been completed, the good conduct phase starts, lasting between 3 and 5 years. The debtor must pay administrative court fees during this period and cover the costs of the insolvency administrator. Side note: In an out-of-court settlement this may be different, here you may go to a (free) debt counselor. The duration of the good conduct phase is calculated as follows: If 35% of the debt and the legal costs have already been paid, it will end after 3 years; if, after 5 years, the costs have already been paid, it is over
By passing the good conduct phase, an exemption from residual debt (with the exception of debts arising from tax evasion, fines or alimony payments) can be granted. For this a corresponding application must be submitted. At this stage the debtor must fulfill some duties:
Unemployed people must strive for a job and
Income, which exceeds a seizure-proof amount, has to be provided to the insolvency administrator
50% of an inheritance has to be given away
Inform the insolvency administrator in case of a job change or a move (to a new house)
In the next article, "Debt - part II: Schufa Score", we'll explain how debt and other data impact your credit rating and your Schufa Score.
Written by Clara Creitz
Finelles Founder. Coach and Consultant (UBS, Towers Watson).