Which situation is worse?

[Gillynuts]

Arguing with my sister over this. Two scenarios

couple, renting on a relatively low joint income of 28k with unsecured debts of 34k

couple on 100k with a small mortgage and 95k unsecured debt

Neither look good.

Both have debts close to their annual income and I guess the proportion of their monthly income servicing the debt are similar.

I wonder what's in lenders minds when they see applications from people approaching that level of indebtedness. Are some of the debts at the risky end of the spectrum with correspondingly high interest?

If it goes wrong the couple who own their home could lose it. Lender(s) sue for the debt then go down the route of a charging order and sale.

One has an unsecure debt larger than their annual income and the other one earns slightly higher annually, compared to their debt.

The second couple also has a possible equity they could sell. To hopefully pay of their debt. The small mortgage made me think, they could stand to clear their debt if they sold their home.

Can't tell without knowing how much assets (wealth) they have.

If either or both have significant savings it changes the situation.

I would say the first couple are slightly worse off

Both as bad as each other. Both have let debt equate approximately a whole year's joint income. Both are spending above their means and both should pay down their debts. The lower earning couple do have options to increase income by working more hours or getting a better paying job.

I'd say the first couple are likely to be much worse off. Small mortgage is very possibly less than the other couple pay in rent per month. High income couples debts are below their annual income, lest say that 20% of income, it still leaves 80k. 20% of the other couples income only leaves them £22,400 to live on.
On face value, It's a complete no brainer to me.

On the face of it, the couple with the lower income. The majority of £28k would be going towards normal living costs, leaving less for debt repayments. The higher earning couple likely has more scope to make some significant repayments.

A snapshot isn't everything though. If you added in the fact that couple 2's house was in a bad state of repair, or maternity leave was due to commence soon for them or the lower earning couple had a low-rent secure HA tenancy and excellent carreer prospects - well, the situation would start to look different.

Well neither.

They're both equally as bad

Both equally as bad, is this yours and your sisters financial situations?

Second couple because high debts high income is less likely to be able to weather change in income eg a job loss.

People often over extend themselves on the basis they have more income available to service the debts but are usually just using more credit and still paying (large) minimums. They're no more able to actually repay the debts from their income than someone with less debt on a lower income. Expensive cars etc, that's the usual trap alongside a couple of credit cards with accumulated high credit limits and high minimum payments.

Also renting vs mortgage - if they wanted to get rid of their debts through bankruptcy the mortgaged household would lose their home (assuming it has equity as small mortgage) but the renting couple would be able to walk away from their debts and keep renting. Both would have issues with their credit files after but the disruption would be bigger for the high income household.

This is from many years working in debt management!

I would say couple two are in a slightly better situation. A small mortgage implies they have reasonable equity in the house, so could potentially downsize and pay off the debt.

Whereas couple one are paying rent and have a very low joint income, so paying of their debt would be much harder.

Does it matter?

Number of DC either couple have?

Any expected changes in circumstances?

Value of second couples home? If they have a lot of equity there could be scope to downsize as a way of getting out of debt.

Both couples need to seek advice to solve the problem rather than arguing about who has it worse.

the former equation of £28k between 2 people could well lend itself to more output through more hours

£11.44 x 40 =£457.6 = £23,795 annual gross pay x 2 =£47,590 annual gross pay
an increase of £19,590 per annum meaning that the £34000 could be paid off in 3 years without alternating spending habits, just working more

But without finer details ?

Its unlikely the salary of nearly £100k will be part time hours

£28k and a high rent leaves little room for savings and repayments.

On £100k there should be leeway to make cuts and savings and repay debt. And with a small mortgage it could be lower than the rental cost. Securing the debt against their equity would be a very risky strategy but is nevertheless an option the rental couple do not have. And if they did lose their home to the debt they would be in no worse situation than the renters.

And on £100k they presumably have a better chance of ongoing income to rebuild from than a low earner.

Both are pretty bad, but couple 1 are worse. They rent rather than own and debt is higher than their joint income.