Debt has become so common that many people think it’s inevitable in today’s world. In most countries, debt has become a huge problem facing individuals and businesses. And this problem worsens in periods of economic recession.
Taking a debt might be necessary at times. For example, an individual might need to apply for a credit card in order to make some purchases and pay back over time. Similarly, a business owner might take up a loan in a bid to expand his or her business.
However, debt becomes a quicksand when unforeseen factors make it difficult for the debtor to pay back. And this is what happens in most cases that lead to foreclosures and declarations of bankruptcy.
Two types of debt exist: personal debt and business debt. While this classification might seem unnecessary, it makes a lot of financial sense because laws make distinctions between these two types of debt for the purposes of collections and bankruptcy. Now, let’s discuss the differences between personal debt and business debt.
What is Personal Debt?
Personal debt is debt that you are legally responsible for as an individual. Though the name might suggest a single individual, personal debt can actually involve more than one party. A good example is when you and your spouse take out a loan together for a home. In that sense, “personal” really just implies “non-business.” So, a debt incurred by both you and your spouse or your friend will be recognized as personal debt because it does not involve a business entity. Personal debt is used to fund consumption.
What is Business Debt?
A business debt, on the other hand, is debt that has been incurred by a company. The owner, directors, or employees of a business can incur debt on a company’s behalf. A company can only be held liable for a business debt if an individual who has the authority to authorize debts on the company’s behalf authorized the debt. The director of a company or another authorized individual can only be personally held liable for the company’s debt if the individual signed a personal guarantee or incurred the debt knowing that company was insolvent. Business debt is used to fund investment.
Both personal and business debts can be secured or unsecured. Secured debt is debt acquired by putting up a valuable property belonging to the potential debtor as collateral. Unsecured debt relies solely on your credit history and your promise to pay.