How are debt and over-indebtedness assessed?

In recent years, the share of households in over-indebtedness has been increasing steadily. For example, in 2009, this percentage increased by 14.8%, with 210,000 over-indebtedness files filed. How to anticipate? How to define the border between healthy and profitable debt, excessive debt, prelude to over-indebtedness?

 

How do we define over-indebtedness?

debt loans

When a household, a person or a household is unable to pay its expenses, its debts and its various loans and when at the same time its debt ratio is high, it can be considered that there is a situation of over-indebtedness.

In practice, this situation results in repeated overdrafts, late payments in rents, unpaid electricity or telephone bills, loan repayments that are impossible to honor. As a general rule, these repeated payment incidents are quickly accompanied by legal proceedings (bank charges, bailiff’s notice, seizure, etc.), because the creditors claim payment of the outstanding debts. We speak of “active” over-indebtedness when this over-indebtedness results from the accumulation of monthly loan payments or a single monthly loan payment.

It is also notable that in 75% of cases, over-indebtedness is said to be “passive” because it occurs as a result of a life accident: unemployment, illness, divorce, etc.

 

The predominant criterion: debt capacity

debt capacity

When a borrower does not have sufficient repayment capacity, lending institutions (banks, specialized organizations, etc.) generally refuse to grant a loan. This limit is set at 1/3 of income. In other words, a borrower will have reached its maximum debt capacity if its debt ratio reaches 33%. This being the case, there may be some exceptions to this rule, such as when the borrower’s income and living standards are sufficient.

Resource assessment. To grant a loan, the lending institution assesses the applicant’s stable resources, such as:

  • Salary,
  • Personalized housing aid,
  • Support payments received,
  • Scholarships.

Next, the credit institution assesses the debt capacity and, as a result, the applicant’s repayment capacity.

To estimate this capacity to repay possible loans, the lender will take into account the disposable income, that is to say the “remainder to live”, which corresponds to the resources making it possible to ensure the costs of daily life after subtracting all the fixed cartoons. To calculate this “remainder to live”, the calculation is simple: it is the client’s income minus his debts, ie his loan charges, his rent, his income tax.

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