What Is Over-Indebtedness?
Over-indebtedness refers to a financial situation where an individual or family accumulates an excessive level of debt that they are unable to repay with their available resources.
The consequences can be severe, to the point of being unable to cover daily expenses.
Over-indebtedness often occurs when people fail to assess their repayment capacity accurately or when unforeseen events lead to higher-than-normal expenses or reduced income.
Here are some common causes of over-indebtedness:
Causes of Over-Indebtedness
- Unexpected Medical Expenses or Job Loss
While we may try not to think about it, it’s important to recognize that a sudden illness can force us to dip into savings and even deplete them in a short period.
This can lead to taking out loans to cover medical costs or to pay for mortgage, rent, or utility bills, especially when income drops due to a reduced ability to work at the same pace as before (as is often the case for freelancers and self-employed individuals).
Similarly, an unexpected job loss can make it difficult to meet financial commitments. For instance, a mortgage payment that was perfectly manageable for a family with two incomes can become unsustainable with just one.
- Imprudent Financial Management
A lack of financial awareness can result in poorly thought-out management of family or personal finances, such as overusing credit cards or installment plans.
Many people fail to realize that purchasing products or services (sometimes unnecessary ones) by installment without having the resources to pay for them outright can lead to much more serious consequences than they might imagine.
We explored this topic in a specific episode of “Love Station,” a video series on financial education created in collaboration with Bank Station.
Additionally, compulsive shopping habits or striving to maintain a lifestyle beyond one’s means can, over time, lead to debt levels that become impossible to repay.
- Changes in Family Dynamics
Events like divorce, separation, or other complex domestic situations can have significant financial repercussions on the entire family unit.
In such cases, expenses for the home and children, previously shared, often fall entirely on one person. Alternatively, financial commitments previously made as a couple may need to be redistributed between the two, creating an urgent need to establish new financial balances to cover the newly incurred costs of living.
How Does Over-Indebtedness Occur?
The process often begins with the accumulation of small debts that are not properly managed.
It starts with taking out small personal loans, setting up financing plans, or misusing credit cards. These debts gradually pile up, placing an increasing strain on monthly budgets.
To cope, people often make only the minimum payments on existing debts, allowing interest to grow and increasing the overall balance owed.
This creates a very real risk of turning to new loans to cover older ones, setting off a vicious cycle from which it becomes increasingly difficult to escape.
As the debt level rises, creditors may increase interest rates, especially when one turns to loan sharks.
Eventually, the accumulated debt becomes unsustainable, leaving individuals unable to pay their outstanding balances. This can have severe or even grave consequences.
Creditors may initiate legal actions to recover owed sums, which could lead to asset seizures, frozen bank accounts, or wage garnishments. Furthermore, insolvency can make it impossible to obtain loans or financing in the future. When turning to loan sharks, the situation can escalate further, often resulting in physical threats.
Prevention Through Financial Education
Financial education plays a crucial role in preventing over-indebtedness, providing the necessary knowledge to manage personal finances responsibly.
With a solid foundation in financial literacy, it becomes easier to create and stick to a budget, save for emergencies, use credit responsibly, avoid impulsive decisions that could lead to debt accumulation.
In general, financial education promotes rational and sustainable economic behaviors.
By gaining proper financial training, individuals acquire the essential tools to make informed decisions, reducing the risk of over-indebtedness while improving their overall economic security.
If you’re interested in learning more about managing your personal finances responsibly, visit the website of the Museum of Saving and explore our blog for additional insights.