People become over indebted when their excessive personal debts make repayment difficult and cause financial distress.
Signs of Over-indebtedness:
- Exceeding debt limits and credit limits. Are you spending more than 14 percent of your take-home pay on non-mortgage credit repayments? Do you sometimes reach the maximum approved credit limits on your credit cards?
- Not knowing how much you owe. Have you lost track of how much you owe? Do you avoid reality by not adding up the total? Are you afraid to add up how much debt you have?
- Running out of money. Are you using credit cards on occasions when you previously used cash? Are you borrowing to pay insurance premiums, taxes, or other large, predictable bills? Are you borrowing to pay for regular expenses such as food or gasoline? Do you try to borrow from friends and relatives to carry you through the month?
- Paying only the minimum amount due. Do you pay the minimum payment—or just a little more than the minimum—on your credit cards instead of making large payments to more quickly reduce the balance owed?
- Requesting new credit cards and increases in credit limits. Have you applied for additional credit cards to increase your borrowing capacity? Have you asked for increases in credit limits on your current credit cards? Have you obtained a cash advance on one credit card to make the payment on another card?
- Paying late or skipping credit payments. Are you late more than once a year in paying your mortgage, rent, car loan, or utility bills? Do you frequently pay late charges? Are you juggling bills to pay the utilities, rent, or mortgage? Are creditors sending overdue notices?
- Taking add-on loans. Taking add-on loans, also called flipping, occurs when you refinance or rewrite a loan for an even larger amount before it has been completely repaid. Suppose that a loan of Rs 100,000 has been repaid down to Rs 40,000. You decide to refinance the debt balance of Rs 40,000 by borrowing Rs 200,000 and using the additional Rs 160,000 (Rs 200,000 – Rs 40,000) for other purposes.
- Using debt-consolidation loans. Are you borrowing, perhaps from a new source, to pay off old debts? Such action may temporarily reduce pressure on your budget, but it also indicates that you are overly indebted.
- Experiencing garnishment. Garnishment is a court-sanctioned procedure by which a portion of the debtor’s wages are set aside by the debtor’s employer to pay debts. Wages and salary income, including that of military personnel, can be garnished.
- Experiencing repossession or foreclosure. Repossession is a legal proceeding by which the lender seizes an asset (called foreclosure, if the property is a home) for nonpayment of a loan. When a lender repossesses property, the borrower may still owe on the debt because of a deficiency balance. A deficiency balance occurs when the sum of money raised by the sale of the repossessed collateral fails to cover the amount owed on the debt plus any repossession expenses (collection, attorney, and court costs) paid by the creditor.