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nsolvency & bankruptcy There are two technical terms that usually describe an individual or entity
with a debt problem. The first is insolvency, which is the inability to pay one's debts as they come due. Even though the total assets of an individual or organisation may exceed its total liabilities, the entity is insolvent if the assets cannot be converted into cash to meet the current obligations.
The other term is bankruptcy which is the legal process in which a person or firm declares inability to pay debts. Any available assets are sold and the proceeds are distributed to creditors.
In Uganda we rarely hear about persons or firms filing for bankruptcy but it is a lot easier to tell if a person is insolvent; that is, if he or she is unable to pay debt as it comes due. There are some telltale signs that could indicate that a person could be having a debt problem. These signs could present themselves in either isolation or combination.
The numbers diagnosis The numbers diagnosis uses financial figures to ascertain if you have a debt problem. First you need to work out how much you owe. Get a piece of paper and rule it into four columns, as shown in the table. For each debt write down: 1) who you owe, 2) how much you pay each
month, 3) what interest you are paying and 4) what is the total remaining debt. Be sure to write down all your debts.
Then, add up the column for how much you pay each month. Then, add up the column for how much total debt you have left. This will tell you exactly what your total debt is on a monthly basis, as well as total.
Next you need to figure out how much you earn. Take out another piece of paper. Make sure you have room for two columns. Now write down 1) where do I get money each month and 2) what is the total amount of
income.
Just as you did with your debts, add up the amount of money you make each month. At this point, you can see what percentage of your income is required to pay off your debt. The higher this percentage, the bigger challenge you will have.
Generally speaking an individual or household that uses up more than 33 percent of their monthly or annual income to cover debt repayments are very likely to have a debt problem. It is very difficult to see how the person or family can be able to use the remaining 66 percent of income to cover recurrent expenses as well as saving and investment needs.
Symptomatic diagnosis One symptom of a debt problem is when a person continues to borrow beyond their means. There are two variants of this problem. The first variant is when a person borrows well knowing that they will not have sufficient money to pay the debt when it is due.
To illustrate consider a person earning Shs600,000 a month who needs Shs800,000 to pay school fees and rent at the same time. This person borrows money from friends and colleagues in the hope that when the salary payment comes they will pay back.
The reality though is that even if they opt to commit the whole salary to debt repayment, they are already Shs200,000 shy of the total required amount, even before you factor in the money they need to depend on in order to go through the next earning cycle. The second type of people who borrow beyond their means are those who borrow against 'hoped for' windfalls or increase in earnings. Because you heard people talking about a salary bonus you rush to a hire purchase shop and order a piece of electronics.
Another symptom of a debt problem is when you always resort to borrowing in order to pay for expenses. Look back and reflect how many times in the past 12 months have you had to get a salary advance or borrow money from friends to pay rent or school fees. Soon a cycle is created where you keep borrowing more and more to pay for the so called 'big expenses' and that little more to pay for groceries. When you have just completed repaying the debt another big expense is around the corner and you have to borrown.
Delaying payment Another symptom of having a debt problem is when you are not up to date with your principal and interest payments. Formal lending institutions like commercial banks, usually classify the debts they have lent out into categories determined by the number of days that a borrower has taken beyond the due date for paying an installment. The longer the debt stays in default the harder it will for the customer to get another credit even though they finally pay up.
When a debt problem is not recognised and dealt with, it can have disastrous consequences on the borrower, family and the community. Uncontrolled personal debts have been found to be at the root cause of broken marriages, health problems, job losses and lost future or opportunities for children who could not continue with studies because the family is deeply in debt. In some communities, generations of children are sold into slavery to pay for debts incurred by their parents or grandparents.