Understanding basic concepts of debt

This is the first step in your Free Debt Relief Guide and it is all about understanding the basics of owing money - i.e. debt.

Having a budget is an important aspect of life and someone who knows how to budget will go a long way in this commercialized society.  Budgeting has a lot to do with keeping the expenses lower than the total income of the household.  Those who are very good at keeping to budget can come up with savings even if they have very meager incomes.

The problem usually starts when a person fails to make an efficient financial plan and his/her outgoings, i.e. spending exceed earnings.  When this happens, a person little or no choice but to borrow money to make up for their financial deficiencies.  Borrowing once or twice because of a mis-managed financial plan is fairly normal, but when borrowing becomes a regular habit, it can place a person in very serious debt problems.

A person who borrows money from somebody else is said to be in debt.  The debts of a person can be minimal or they can reach to millions depending on the credit limit of the person concerned.  Sometimes, a person who has some assets, but isn't liquid, can use those assets to get (borrow) cash.  In these circumstances the person can be indebted for an amount less or more than his assets.

There are laws which provide that a person cannot be forced to provide services as payment for his/her debts. This is called "undue servitude" and it is prohibited by the laws of some countries. However, there are situations when the person who is in debt can choose to settle his obligations by rendering his services.

This can happen if someone is, for example, talented in his craft like painting and he selects to pay his debts by creating a painting for the creditor or the creditor's assignee. Sometimes it is also possible for person to pay his debts gradually or on an installment basis.

When a person dies the law provides for a priority list of creditor types in the payment of debts.  Of course, payment of taxes owed to the government will almost always come first. The second priority for debt payments includes funeral expenses of the deceased, payment for the wages of people and any monies owed to the bank.

Debt is really a simple concept, which provides that a person who borrowed something from another is obliged to repay that debt.  However, the concept of debt gets more complicated when considering other concepts like mortgages, interest rates and other charges.  Interest makes most debts double or even triple in amount. Often, the interest rates owing for a debt are even higher than the principal amount borrowed.

A person who wants to get credit can usually do so in the form of a loan. A loan can either be secured or unsecured. A secured loan means the debtor borrowed money and supported the loan by collateral or a security for the loan. The security or collateral can be a house, a car or any asset of the debtor. An unsecured loan means otherwise, i.e. the lendor, for whatever reason, agreed to the loan without any collateral.

Most creditors require a security before granting a loan because it gives them something to hold on to - sometimes known as a "lien" - in case the debtor fails to repay the money owing.  When the debtor fails to repay the debt within the agreed time, the creditor can foreclose the security or the collateral. 

However, an unsecured loan does not mean that the debtor can renege on the debt. When the debtor fails to re-pay the loan, the creditor can still run pursue him by filing a case in court. When this happens the debtor who has no cash can sell some of his/her assets to pay for the outstanding debt.

Being in debt is common even for the rich and the famous, the difference between them and the less well-off is that their debts can be in millions since they have far more assets to support their loans. Unsecured loans very often have significantly higher interest rates to make up for the lack of security.

Even third-world countries are indebted to developed countries. However, the debts of a country can go on for extended periods because there are often additional, wider political and economic issues involved. This can sometimes result in those debts being repaid with interest, or on occasion those debts to poor countries are cancelled.

Now read on for tips about curbing your spending to reduce your debt.