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Could an outbreak of defaulting debtor payments lead to a debt bubble burst?

Let’s be honest. Daydreaming about life after Lockdown has become commonplace. Some might dream about visiting their families back home, a holiday at the coast or a simple braai with a few friends. The reality however might not be as dreamy as we’d come to hope. Legal battles stemming from the inability of certain persons or businesses to perform their contractual duties are expected to become commonplace.

Whilst most larger companies are geared for these legal battles smaller businesses and individuals that default on loans are most likely not. Especially when the opponent might be a multinational company with almost infinite resources and legal capabilities. Some individuals or even smaller businesses might have been granted a payment deferment.

“What happens once the deferment period or so called “payment holiday” ends and the debtor still cannot perform their contractual duties?”

Although we believe that credit providers will not collect on consumers who promptly return to making their contractual payments. There will inevitably be many debtors who will lose their jobs. Some might take longer to recover financially than will be tolerated by credit providers. For these persons the Covid-19 aftermath might become a living nightmare.

Here’s what we think might happen in the weeks, months and years following the National Lockdown.

  • Debt collection agencies and creditors will start collecting on debtors that were in default prior to the National state of emergency.
  • Vehicle repossessions in the form of voluntary surrender will become commonplace.
  • Unemployment increases.
  • Many debtors who were granted “payment holidays” will inevitably begin to default on these arrangements.
  • Causing the debt bubble to burst

“The bursting of a debt bubble means that an  large number of people and businesses stop paying their debts. Which causes the value of the debts to plummet and interest rates to soar.”

Higher risk could result in more restrictive lending criteria, higher interest rates and lowered investment by banks. This might contribute to a lower GDP and an increased risk in a prolonged recession. In similar situations during the 2008 financial crisis even larger firms could not survive the fallout of the bursting debt bubble.

There might also be other outcomes. We might see a resurgence in consumer confidence and spending once restrictions are lifted combined with a well implemented stimulus package which might just help us avoid disaster. 

Whatever the fallout of the impending debt crisis might be there are solutions available to individuals. Speak to your financial advisor or call FinFix at 0876556000 if you think you might be in need of debt restructuring.

TAKE NOTE: This is an opinion piece. None of the content on this site should be taken as advice of any nature.

Written by Chris Coetzee for FinFix – Reduce. Consolidate. Protect.