What Is Debt Burden?

by Diane Lynn ; Updated December 07, 2018
Credit card debt can add to your overall debt burden.

A debt burden can be defined as a significant sum of money that one business or organizations owes another. Unlike standard debt, a debt burden derives its name from the fact that the sum of money owed is large enough to create serious repayment problems for the debtor. While we commonly think of a debt burden as something that occurs primarily in the business world, it is not unreasonable to assume that individuals could accrue similar problems.

For example, home mortgages and other sizable purchases often require the use of financing in order to complete the transaction. Were an individual suddenly lose the ability to repay this debt, it is safe to assume that they will have acquired a debt burden. Understanding this burden finance definition can help you place into context the types of financing and fiscal loans used today, as well as better understand how your own debt problems compare to those around you.

Tips

  • A debt burden represents the amount of money you owe and the current cost of financing the debt. The cost of financing includes any interest and penalties you pay on a recurring basis during the process of repaying the principal on your loan.

Defining a Debt Burden

Generally speaking, a debt burden is described as the amount of money you owe relative to the amount of money it costs you to service your debt. In general, the cost of your debt includes interest that you pay, fees for attaining the debt and occasionally, extra fees such as late payment fees, loan servicing fees and annual membership fees. For example, a 30-year $100,000 mortgage loan with an interest rate of 6 percent will cost you an additional $115,000 in interest if you make payments for the entire 30 years.

These additional expenditures affiliated with your debt can make repayment of principal difficult due to the fact that you will typically be repaying interest throughout the lifecycle of the debt itself. For some individuals or businesses, the inability to ever begin making substantial progress on debt principal contributes significantly to the creation of a debt burden.

Assessing Various Types of Debt Burdens

Governments have debt burdens in the form of publicly held securities, such as U.S. Treasury securities. Debt burdens can also take the form of internal debt, which includes programs such as Social Security or state retirement. Compared to governments , individuals have a more limited scope of debt. That being said, it is crucial to remember that each debt you owe has the potential to become a debt burden if you do not pay off the loan before fees and interest begin to accrue.

Credit cards are one of the most common forms of debt burdens involving individuals today. Unless credit card debt is completely repaid at the end of each month, the cost of interest continues to accrue on top of your initial balance, slowly building a debt burden. Mortgage loans cars, boats, consolidated, home equity and unsecured loans all have potential to add to your debt and cause you to incur more of a debt burden.

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Reducing Your Debt Burden

Paying off your debts before the end of the term can help reduce your mounting debt, meaning that you will be reducing the interest you owe as fast as possible. Of particular interest is the fact that the Federal Reserve instituted new credit card rules in 2010 that can help you understand how much faster you can pay off your debt by making more than the minimum payment.

It is also important to note that most car and home loans do not have a prepayment penalty. Payments over your minimum monthly payment reduce your principal balance, thus helping you save interest while paying off the loan faster. Avoid incurring new debt while paying down your balances is by and large the most effective way to diminish and ultimately eliminate your debt burden.

Exploring Additional Considerations

If your debt burden appears too large to handle, you may choose to consider refinancing your debt to reduce your interest rate. This, in turn, will reduce the overall cost of interest and reduce your debt burden in the process.

It is in your best interest to think carefully before committing to a new loan or purchasing an item using a credit card. If your spending habits are under control and you have demonstrated the ability to live within your monthly budget, a consolidation loan may help you reduce your overall interest cost of paying off your debts. Meet with a financial counselor or non-profit credit counselor to get better control over your spending habits and debts. Although a debt burden may initially appear quite intimidating, it is definitely within your power to tackle this issue and create a strategic repayment pan which ensures that your debt-related problems will eventually be solved.

Researching Bankruptcy and Debt Burdens

For some individuals, the pressure of a debt burden is simply too much to handle. Although bankruptcy will likely wreak havoc on your credit score, it may represent a viable solution for eliminating your debt problems and allowing you to once again begin with a "blank slate". Whether or not this occurs, however, is entirely dependent on the specific type of bankruptcy you file for.

By and large, the two most common forms of bankruptcy used by individuals are Chapter 7 and Chapter 13. In a Chapter 7 bankruptcy, a court-appointed trustee has the ability to sell any assets belonging to the debtor in order to satisfy the outstanding debts. In exchange for the liquidation of these assets, the debtor's financial obligations are eliminated entirely. Although Chapter 7 bankruptcy is the most common form of bankruptcy filing today, some individuals may not qualify if their income level exceeds certain amounts. That being said, the vast majority of individuals will find that they are indeed eligible for this service.

Chapter 13 bankruptcy, although somewhat less common, is still very effective at helping eliminate debt burdens. As part of a Chapter 13 filing, individuals are not forced to sell their assets. Instead, a payment plan is created which allows the filer to slowly repay the debt they owe over a period of time. Following a Chapter 13 filing, the amount of debt that an individual will be required to pay at regular intervals cannot exceed 15% of their disposable income. Compared to a Chapter 7 filing, Chapter 13 bankruptcy help ensure that individuals are not forced to sell their property in exchange for slowly repaying back the money they owe.

If you think bankruptcy may be the appropriate option for settling your debt burden, it is strongly recommend that you consult with an attorney, as these filings could have a significant impact on your future financial health. Whatever you choose to do, you should evaluate your plan and ensure that it places you on a sustainable and responsible path towards financial freedom. Once your debt burden has been eliminated, a variety of new opportunities and greater degree of fiscal independence will once again be available to you.

About the Author

Diane Lynn began writing in 1998 as a guest columnist for the "Tallahassee Democrat." After losing 158 pounds, she wrote her own weight-loss curriculum and now teaches classes on diet and fitness. Lynn also writes for The Oz Blog and her own blog, Fit to the Finish. She has a Bachelor of Science in finance from Florida State University.

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