Over-indebtedness
Over-indebtedness refers to a situation where an individual, corporation, or even a nation owes more than it can afford to repay, often resulting from factors such as job loss, illness, or poor financial management. This condition can arise from the accumulation of various debts, including credit card balances, loans, and other financial obligations, which become unmanageable over time. Common indicators of over-indebtedness include consistently missing bill payments, spending beyond one’s means, and a high debt-to-income ratio, which measures the proportion of income that goes towards debt repayment.
Historically, over-indebtedness has carried a stigma, with debtors facing severe societal repercussions, including imprisonment in some cultures. Today, various solutions exist for those struggling with debt, including refinancing options, establishing a budget, or declaring bankruptcy. However, these solutions can significantly impact a person's credit rating and future financial opportunities. As consumer credit options have expanded, especially in recent decades, many individuals, particularly young adults, find themselves trapped in a cycle of debt, often relying on credit to meet basic needs. Recognizing and addressing signs of over-indebtedness early can help individuals regain financial stability and prevent long-term consequences.
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Over-indebtedness
Overindebtedness is the state of owing more than one can pay. Debt is money borrowed to pay for goods and services, and may come in the form of a loan or credit. Borrowers agree to repay debt, and usually agree to pay interest, which is a fee for the use of funds. Overindebtedness occurs when a person has borrowed more than he or she can repay. This may occur due to many reasons, including changes in employment such as the loss of a job, or illness or injury that causes an individual to miss work. Overindebtedness may be a state experienced by nations, individuals, and corporations.
Solutions to overindebtedness may include new payment schedules, changes in spending habits and lifestyle, or even bankruptcy, which means a person asks a court to forgive some or all debts. Some of these solutions can have a significant effect on an individual's credit rating, which can even affect one's chances of getting a job or renting an apartment.
Background
Debt has been regarded as a crime and a moral failing. In ancient Rome, most criminals were banned from society or executed, but debtors were locked up. The idea behind imprisoning people for owing money was that they might find a friend or relative to repay their debts. Those who did not pay their debts also might be sold into enslavement or work in indentured servitude, meaning they worked until they earned enough to cover the debt.
The colony of Georgia was established in North America in 1733 as a place for English citizens who were in debt to work. Each received fifty acres of land to farm, but could not sell it. The experiment failed, however, in large part because many settlers were disgusted and frustrated by the poor growing conditions of their plots and abandoned the colony.
In Victorian England, which includes most of the nineteenth century, debtors were criminals. A person could be sent to one of many prisons set up just for debtors. The convict could live there with his family. His relatives could come and go, but the debtor had to stay inside. Children were often born in debtors' prisons, and many grew up there. Living conditions were horrible. Fleas, lice, and rats were common, food and water were poor, and many people became sick. About 25 percent of inmates died. Some were locked up for more than thirty years for debt. Other countries in Europe had laws limiting terms of imprisonment to one year, but England did not. England eliminated debtors' prisons with the Bankruptcy Act of 1869.
Consumer credit, which developed during the twentieth century, created a large pool of debtors. Informal loans were commonplace with many small merchants, who had close relationships with their customers and permitted some leeway in payment—for example, a grocer would allow a family to take food on credit and the bill would be settled on payday. Some larger companies allowed payment plans for items. The rise of the automobile industry during the 1920s signaled a new attitude toward lending. Most people could not afford to pay cash for a car, so dealers helped them finance the purchase. In time, other businesses, including those selling household appliances, also offered financing.
The first universal credit cards emerged during the 1950s. Late in the twentieth century, many credit card issuers offered credit to people with few resources. College students, for example, were often able to get lines of credit even if they had no income. Many consumers found themselves struggling to pay off debt. The recession of 2008 further strained consumers as unemployment rose and many young people emerged from college with student loan debt and few career prospects.
Overview
According to various analysts, 77 to 80 percent of American households carry debt. A poll conducted by the Federal Reserve in 2024 showed that 26 percent of households making under $25,000 were not able to pay their bills in full, while only 6 percent of households making over $100,000 were not able to pay their bills in full. Around 45 percent of Americans make at least one late payment a year. Late payments increase debt, because they often generate fees and may cause a credit card company to raise a customer's interest rate, so the customer must pay more.
Some signs of overindebtedness, or overextension, include charging more on credit cards than the amount one is paying each month; difficulty paying bills; failing to save for retirement; making purchases while putting little or no money down (100 percent financing); and having many lines of credit available, which may allow an individual to amass debt.
Individuals can determine their level of debt by calculating the debt-to-income (DTI) ratio. This is based on one's gross income, or the amount one is paid before taxes and other deductions are taken out. To do this, one must add up all monthly income, including wages, tips, and other funds. Next, one adds up all monthly debt payments, including student loans, credit cards (using the minimum payment), housing costs, and auto loans. Finally, the person divides the total monthly debt payments by the monthly gross income. The resulting number is the debt-to-income ratio. For example, if income is $2,000, and debt is $800, DTI is 40 percent. Credit agencies view a ratio of 35 percent or less as manageable. A DTI between 36 percent and 49 percent is adequate, but could be better. A DTI of 50 percent or greater signals trouble, because the individual is stretched to the limit and may be unable to make payments due to any unexpected expense.
Many people amass debt as young adults. Often, they are starting their work lives with low-paying jobs. Credit card companies often offer credit to young adults and college students. People may charge more than they can afford to pay, and make minimum payments. The debt balloons, and over time, the consumer is unable to make even minimum payments. Some people find they are paying so much on debt that they no longer have enough money to meet immediate needs, including rent, transportation, and food. They may begin to use credit cards to pay for groceries and other needs, especially near the end of a pay period, when they no longer have access to cash and must wait for their next paycheck. This creates and perpetuates a debt cycle.
Individuals who are overextended have many options for reducing debt. First, establish a monthly budget, which involves listing all monthly income and all monthly expenses, including debts and the cost of transportation, groceries, and other expenses. Next, subtract expenses from income. Finally, if expenses are greater than income, or little remains, cost-cutting steps may be necessary. These may include refinancing or consolidating loans, lowering housing costs, and cutting expenses.
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