Overindebtedness

Overindebtedness is a situation in which an individual or household owes more debt than can be serviced from current income and available assets, leaving the debtor unable to meet debt obligations as they come due. It can arise from sudden shocks or gradual increases in indebtedness and may evolve into insolvency or bankruptcy. At the macro level, overindebtedness describes a situation where a population's aggregate debt burdens threaten financial stability.

Common causes include excessive borrowing relative to income, easy access to credit, and unanticipated expenses such as medical costs or car repairs. Economic shocks, unemployment, wage stagnation, and rising interest rates can push households from prudent debt levels into overindebtedness. Limited financial literacy, poor budgeting, and lack of social safety nets also increase vulnerability.

Indicators of overindebtedness include high debt-to-income and debt service ratios, persistent arrears, loan restructurings, and insolvency filings. The consequences can be widespread, including damaged credit profiles, asset loss through foreclosures or repossessions, reduced consumption, and adverse effects on well-being and financial security.

Households may respond through debt management, repayment plans, debt consolidation, or seeking financial counseling. Preventive steps include emergency savings, budgeting, diversified income, and insurance. Caution is needed to avoid perpetual consolidation cycles or high-cost debt, which can prolong distress.

Policy and institutional responses aim to detect distress early, ensure responsible lending, and provide relief where necessary. Approaches include debt relief mechanisms, efficient bankruptcy procedures, income-based repayment options, financial education, affordable credit, and social protection to reduce exposure to income shocks.