The Consequences of Too Much Debt
By Ryan Healy | August 6, 2008
Too much debt leads to all kinds of symptoms.
For instance, stress. Late fees. A sense of impending doom.
We even have a phrase to describe the symptom of spending too much on a house. We call it being “house poor.”
In other words, you’ve got all your money tied up in the house — so you can’t afford anything else.
These symptoms are bad, of course. But they are not nearly as catastrophic as the new symptom of too much house debt.
It’s called a “voluntary default.”
I’ve mentioned it before on this blog. And now, voluntary defaults are becoming so commonplace that it’s being covered by mainstream media.
The potential for a voluntary default happens when:
1. A homeowner has overextended himself to buy a house he can’t really afford.
2. The price of the house drops below the mortgage balance.
3. The mortgage interest rate begins to ratchet up, thereby increasing the monthly payment.
When this happens, a homeowner wonders: “Why am I paying more money every month for a house that couldn’t even be sold to pay off the mortgage balance?”
Rather than continue paying, the homeowner decides to walk away.
Hence, “voluntary default.”
Many times, the homeowner won’t even contact his bank to try to renegotiate the terms. He’ll simply move out and get a rental before his credit score drops.
The BBC describes the current housing market in the U.S. as a “time bomb.”
If things don’t change, we could see a tsunami of voluntary defaults that brings the banking industry — and the world economy — to its knees.
It seems the consequences of too much debt is finally catching up with us.
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Topics: Debt, Economics, Foreclosures |
One Response to “The Consequences of Too Much Debt”
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August 11th, 2008 at 6:01 am
[...] Healy explains to us what the word “voluntary default” means in The Consequences of Too Much Debt posted at Debt Reduction [...]