Almost everyone has some form of debt, but when does it become a problem?

SINGAPORE: In Singapore, it’s common to take on some form of debt – whether it is for  education, mortgage loans, credit card bills or installment payments.

However, such debts can turn into problems if they are not managed well.

Ms Tan Huey Min, general manager of Credit Counselling Singapore, shared with CNA’s Money Talks podcast about how people end up with serious debt, what happens if money is not repaid and how to help yourself or someone who is in debt.

When does debt become a problem?

One of the signs that debt is a problem is using credit to pay for living expenses till the next paycheck, Ms Tan said. She added that another sure sign is when the outstanding amount to be paid is increasing.

“It will be a serious problem when I can't even service my debts, or I'm actually borrowing to service my debts,” she said. Even worse is when creditors start calling, she added.

When creditors take legal action due to late payments or lack of payment - that is when things are most serious, she said.

Who racks up serious debt?

People from all walks of life rack up debt, said Ms Tan.

"Being in debt doesn't mean that the persons are not educated or not financially savvy,” she added. 

Her firm sees clients who need help with debt regardless of educational qualifications, including postgraduates, she said.

Among the clients are those who have debts to service despite earning less than S$2,000 monthly, she said.

"But we also have people who earn five figures a month come to see us," she said.

A majority of the firm's clients - 60 to 70 per cent of them - are males, she said.

Ms Tan said that the big debts her firm has seen involve S$1 million or S$2 million.

What are the reasons people get into such problems?

Serious debt results from more than one reason, said Ms Tan.

For some, it is because their income dropped substantially due to employment or other issues, but their financial commitments remain the same.

"Spending - you can do something about it to a certain extent. But commitments - meaning that you have already taken up a few loans that you need to service - that we will have to continue to pay," she said.

However, people who have lost their jobs may struggle if they do not have savings to tide them over, she said.

"That means people will rely on credit facilities to take care of their living expenses," she said.

Other reasons for serious debt include overspending, which means spending without planning, she said. Sudden medical bills without sufficient or with no insurance coverage at all can also add up, she said.

For some, their misplaced kindness may be the root of their financial problems.

“So (if) the friends or the family members come and ask him for a loan and then he doesn't have savings himself, but he wants to help. So he takes credit facilities to give up the loan or agree to be a personal guarantor,” she said.

This then backfires when the person they helped is not able to return the money, she said.

“The problem is, the person really has no way to repay you. But you are the person who took up the loan. You are the personal guarantor, the creditors will come after you because you are the one who borrowed,” she said.

However, the biggest debts are incurred through gambling and losses in investment, she said.

How can you help a friend or loved one in debt?

People who are in overwhelming debt may be in denial, Ms Tan said. While concerned loved ones may be trying to seek a resolution on their behalf, they can only be helped if they want to be helped, given that the debt is under their name, she said.

Helping to pay off a debt may not be the answer because the debtor might end up in a debt again, she said. Worse, sometimes, family members who are in no financial position to help in the first place, but still do so, may end up being in debt as well, Ms Tan said.

It can be tough to get through to a debtor who is in denial, she added.

“The person can get angry and uncooperative. So being a friend or being a family member, (you) really have to be very patient,” she said.

She added, however, that one way families can help is to take care of household expenses so that the debtors can dedicate their earnings to clearing their debt.

What's the worst that can happen if I don't repay my debt?

A creditor that is owed can issue a writ of seizure and sale. When this happens, someone appointed by the court will go to the debtor’s house and mark items that have been seized.

If no payment is made, the items will be sold away, she said.

“It could be very traumatising because this is done at home.  If you have neighbours, it's possible that your neighbours may see it,” she said.

The other possible action is to sue the person for bankruptcy, she said.

Should I resort to declaring bankruptcy?

While declaring oneself bankrupt is an option, Ms Tan said that it should be viewed as a last resort, after exploring all other solutions first, including discussing with creditors.

“Some creditors may offer you their own in-house debt relief plan. If that helps, then there’s no need to go for bankruptcy,” she said.

She added that firms like hers that can help with a debt management programme are another avenue. Her firm has a support programme for bankrupts and their families, she said.

People with money issues, especially those who are newly bankrupt, experience a lot of stress, she said.

“There's probably a lot of emotional turmoil and relationship issues so we have taught these people how to better manage their relationship problems, their mental stress and psychological stress,” she said.

If need be, they will be referred to other agencies that can help as well, she said.

She noted that bankruptcy records are publicly searchable. Even after being declared bankrupt, the individual will need to pay at least a fraction of the amount, she added. Bankrupts cannot travel without first getting permission, she said.

“There are responsibilities expected of a bankrupt on top of making the monthly contribution and target contribution in order for me (him) to get discharged and record removed,” she said.

What kind of debts are considered good?

A debt that can help generate income or build human capital, for instance, is considered “good” debt, Ms Tan said. In the case of an education loan, one can earn more after graduation; while loans for property investments can allow for rental income, she said.

But still, people need to be mindful about how much debt to take, she said.

“No doubt there is potential, but I still have to think of ‘am I able to service?’ I think that is a very important question to answer before we apply for a loan,” she said.

One way to assess the need for a loan is thinking of its purpose - whether it is needed and whether it is needed now, its affordability - based on an individual’s monthly cash flow, and whether there are options to taking a loan or installment plan.

What can I do if I am in debt or prone to debt?

If a person is impulsive in making purchases, he should not have credit cards, she said.

“If you don't have the cards with you, you can’t buy things that you don't have cash to purchase and the worst scenario is that you use up your savings because you still have a debit card. But at least you don't have a credit issue,” she said.

While they may have to figure out how to stay afloat until they get their next pay, this is a “smaller problem to address than having a S$10,000 credit card bill outstanding to address”, she said.

She added that her firm holds free-of-charge weekly talks on how to manage debt problems, the dos and the don’ts and the options available to debtors. If engaged, the firm will draw up a family living expense budget and work on a repayment arrangement with the debtors and give creditors a proposal, she said.

“If the creditors accept what he (the debtor) proposed, now the ball is in his court. He just needs to make payment according to what he has proposed, and as long as he makes the payment in full, on time, every month, he can see himself become debt free in a few years down the road,” she said.