So common is debt that many people consider it inevitable in today’s world. In most countries, debt has become a major problem for individuals and businesses. And this problem is exacerbated in times of economic downturn.
Sometimes a debt collection may be required. For example, a person may need a credit card in order to make purchases and pay off over time. Likewise, a business owner can take out a loan to expand their business.
However, debt becomes quicksand when unforeseen factors make it difficult for the debtor to pay. And that mostly happens, which leads to foreclosures and bankruptcy filings.
There are two types of debt: personal debt and business debt. While this classification may seem unnecessary, it makes a lot of financial sense as the laws differentiate between the two types of debt for foreclosure and bankruptcy purposes. Now let’s discuss the difference between personal and business debt.
Personal debts are debts for which you are legally responsible as an individual. While a name can refer to one person, personal debt can involve multiple parties. A good example is when you and your spouse take out a home loan together. In this sense personally really means not for business … Thus, the guilt incurred by you and your spouse or friend is recognized as a personal guilt as it is not related to the business entity. Personal debt is used to finance consumption.
What is corporate debt?
On the other hand, a business debt is a debt that a company has incurred. The owner, director, or employee of a company can go into debt on behalf of the company. A company can only be held liable for a business debt if the person empowered to pay the debt on behalf of the company has paid the debt. A company’s director or other authorized person can only be held personally liable for the company’s debts if they have signed a personal guarantee or accepted the debt in the knowledge that the company is insolvent. Business debt is used to finance investments.
Both personal and business debt can be secured or unsecured. Secured debt is debt that has been acquired by providing valuable property to a potential debtor as collateral. Unsecured debts depend solely on your credit rating and your promise to pay.
Causes of Bad Business and Personal Debt
People have personal debt for many reasons. This can sometimes be due to drastic unforeseen circumstances such as job loss and poor health that require enormous medical expenses. It could also be because the individual pay rates are insufficient to cover the cost of living, even if they work full-time or combine jobs.
Some people are paid well and do not waste money on unexpected expenses, but they do acquire debt. These people lack the financial discipline to stay on budget or they just don’t understand the real difference between needs and wants (So they pay for everything in general ).
Companies also get into debt in different ways. Bad conditions in the overall economy and in the specific market in which a company operates can lead to the acquisition of debt. Lack of planning and balanced thinking can lead to hasty decisions and business failures caused by high debt. Other common causes of corporate debt include poor business location, loss of key employees, lawsuits from competitors or injured customers, personal cases such as illness and divorce, unforeseen disasters, and criminal activity such as floods, storms, theft, and fraud.
The Consequences of Bad Business and Personal Debt
Personal debt reduces the amount of your disposable income. And if you can’t pay off in a timely manner, it will lower your credit score, making it difficult for you to get personal loans in the future. Personal debt can also greatly reduce what you leave behind to your survivors when you are gone ( You can even leave them in great debt ). Business debt creates trouble and ultimately leads to bankruptcy.
How to Eliminate Bad Business and Personal Debt
The best way to eliminate personal debt is to have a realistic budget and track your expenses. It is wise to start with the highest interest rate debt and set aside as much as you can afford to pay off the debt. Alternatively, you can use debt consolidation, refinancing, negotiation, or settlement to start over or reduce your debt to a lower level that you can easily manage.
For corporate debt, it is best to increase business income and keep costs down to the lowest minimum. However, there are also options such as debt consolidation, negotiation and bankruptcy.