Budgeting is an
important aspect of living and a person who knows how to budget will
go a long way in this commercialized society.
Budgeting has a lot to
do with keeping the expenses less than the total income of the
household. Those who are very good at budgeting can come up with
savings even if they have meager incomes.
The problem sets in
when a person fails to make an efficient financial plan and his
expenses exceed his earnings. When this happens, a person has no
choice but to borrow money to make up for his financial deficiencies.
Borrowing once or twice because of a mismanaged financial plan is
normal but when borrowing becomes a regular thing that can put a
person in serious debt problems.
A person who borrows
money from another is said to be in debt. The debts of a person can be
minimal or can reach up to millions depending on the credit limits of
each person. Sometimes, a person who has assets but isn't liquid can
use these assets to get cash. Under this term, the person can be
indebted for an amount less or more than his assets.
There are laws that
provide that a person can never be forced to render services as payment for his debts. This is called undue
servitude and is prohibited by the laws of some countries. However,
there are situations when the person who is in debt opts to settle his
obligation by rendering his services.
This can happen if a
person is so talented in his craft like painting and he opts to pay
for his debts by creating a painting of the creditor or the assignee
of the creditor. Sometimes, a person can pay his debts gradually or on
an installment basis.
When a person dies,
the law has provided for a hierarchy of preferences in the payment of
such debts. Of course, payment of taxes to the government will always
come first. The second priority for debt payments includes funeral
expenses of the deceased and the payment for the wages of people.
Debt is really just a
simple concept, which provides that a person who borrowed something
from another is duty bound to pay that debt.
However, the concept
of debt becomes more complicated with the introduction of other
concepts like mortgage, interest rates and other charges. Interest
makes most debts double or even triple in amount.
More often, the
interest rates due for a certain debt is even higher than the
principal amount borrowed.
A person who wants to
get credit can do so in the form of a loan. A loan can either be
secured to unsecured. A secured loan means the debtor borrowed some
money and supported the loan by collateral or a security for the loan.
The security or collateral can come in the form of a house and lot, a
car or any asset of the debtor. An unsecured loan means otherwise.
Most creditors require a security before granting a loan because it
gives them something to hold on to or to forfeit in case the debtor
defaults in payment. When the debtor fails to pay the debt within the
agreed timeframe then the creditor can foreclose the security or the
collateral.
However, having an
unsecured loan doesn't mean that the debtor can renege on his debts.
When the debtor fails to pay his loans, the creditor can still run
after him by filing a case in court. When this happens, the debtor who
has no cash can sell some of his assets to pay for his outstanding
loan.
Being in debt is
common even for the rich and the famous; the only difference between
them and the common people is that their debts can be in the millions
since they have more assets to support their loan. Unsecured loans
most often have higher interest rates to make up for the lack of
security.
Even third world
countries are indebted to more developed countries. However, the debts
of a country can go on forever because they keep on paying their loan
but they also get new credits as their credit ratings go up.
