Debt and debt capacity: what is it?
It is first necessary to separate the concepts of debt and debt capacity.
The concept of indebtedness is used to designate the situation in which an individual or a legal person (for example, a business) finds himself when he has undertaken to reimburse a credit from a creditor. In most cases, these debts are contracted with a financial organization, most often through a bank.
Generally, a person goes into debt to finance expenses that he is unable to bear immediately. Think, for example, of buying a house, a consumer good or carrying out renovation work. Sometimes, the borrower has the savings necessary to finance his investment in cash, but still chooses to take out a loan, the latter leaving him better flexibility in the short and medium term. We also speak in this case of debt.
Contrary to what it might suggest, the notion of indebtedness is therefore not linked to possible financial problems of the debtor. In accordance with the legislation in force, the responsible credit organizations only grant loans to households with the resources necessary to repay the loan.
Before validating or refusing a credit request, any financial organization carefully examines the applicant’s file. If the guarantees offered by the latter are not considered sufficient, the request is rejected. This is particularly the case when the debt capacity of the tax household is not satisfactory.
The debt capacity, or repayment capacity, corresponds to the maximum monthly payment that the borrower can support when he applies for a loan. It is notably calculated according to:
- the applicant’s stable and effective resources – salary, alimony, housing assistance, scholarship;
- loads that he must already bear – rents, monthly loan payments, income tax, etc. It is generally estimated that the amount spent by a household to pay its expenses should not exceed one third of the income generated.
The lender will therefore calculate your debt ratio to see if it meets the banking criteria for obtaining credit. Rate which will be weighted by the notion of the remaining living (income-expenses), because a higher debt ratio does not always mean that the operation is not possible, for example when the income levels are themselves important.
What to do in the event of significant debt?
Debt problems are not necessarily linked to too low income. They can result from an imbalance between income and expenses.
We can then implement solutions to avoid the situation of over-indebtedness. Reorganizing the budget is then a solution to consider. To do this, it will above all be a matter of carefully analyzing your expenditure items and determining which are the most expensive. You can then highlight the expenses that could have been avoided or reduced.
To better understand how your budget works, it is recommended to classify your expenses into three main categories :
- Fixed expenses (rent, credit, insurance, tax, invoices)
- Current expenditure (food, health, hygiene)
- Occasional expenses (travel, clothing, outings).
To reduce the amount of your charges, you can also compete. You may have signed a very favorable electricity contract at the time of signing, but which is no longer as competitive today. Do not hesitate to use the online comparators which will allow you to find the most interesting offers on the market. Also remember to reread your loan contracts, which may provide for modularity (lower the amount of monthly payments for example).
Redemption and consolidation of credits
If the reduction in your charges is not sufficient, it is possible to contact a broker to buy back credit. This involves grouping all of your credits into one. The repayment tenure will be longer, and the final cost may be higher. However, the grouping of credits makes it possible to no longer have to repay a single monthly payment of credit throughout the loan, of an amount lower than all of the previous installments. Hence a larger monthly living surplus, and a lower debt ratio. Note, the repurchase of credits can also be used to lower its debt ratio in order to allow the financing of a project such as the acquisition of real estate, for example.
When do we talk about over-indebtedness?
Over-indebtedness corresponds to the deterioration of an individual’s financial situation. This is evoked when a person is unable to repay the amount of his claims, despite all the efforts made and his good will. Articles L. 711-1 and L. 712-2 of the Consumer Code give the legal definition of over-indebtedness: “The situation of over-indebtedness is characterized by the manifest impossibility of meeting all of its non-professional debts due and to fall. ”
Over-indebtedness is most often caused by a hazard in life (loss of job, death of one’s partner, illness, etc.). These situations are responsible for around 75% of the cases recorded each year in France. It can also result from the accumulation of credits or a sudden increase in the costs borne by the household. This situation, often very difficult to live with, manifests itself by accumulated delays in the payment of rents or energy bills, but also by repeated overdrafts and the non-reimbursement of monthly loan payments.
What to do in the event of over-indebtedness?
In the event of over-indebtedness, it is no longer possible to have recourse to the credit buy-back solution. But the French administration comes to the aid of individuals in situation of over-indebtedness. Some 200,000 households use it each year. It is therefore possible to turn to the Cream bank to request the establishment of a procedure. A commission then analyzes the applicant’s situation after filing their over-indebtedness file (this requires filling out a form).
When it has become impossible to repay debts, it is possible to enter the debt commission. The principle is simple: after studying the file, a specialized committee validates or invalidates the request. If the over-indebtedness situation is recognized, a conventional recovery plan of a maximum duration of 7 years may be signed by the debtor and his creditors. The Cream bank is also empowered to impose measures. For example, this involves rescheduling debts, applying a reduced interest rate or deferring repayment. In the most complex debt situations, receivables can be canceled.