In many cases, a person falling into a debt trap will have at least two personal loans and a few credit cards. In order to service one loan, the person borrows from other sources which will only aggravate the problem thus leading to a debt trap.
The primary concern that people forget is to borrow or spend money consciously. Here are a few steps that people need to do.
Your family should know about your expenditures and loans:
This is a common mistake a person makes; by not revealing their financial struggles to their families. When the recovery agents come knocking at the door, they are shocked.
According to financial planner’s advice, it is always good to inform your spouse or parents. So when they become aware of certain loans, they can cut down on the expenses to increase the outgo.
Plan to repay your debts:
List all the monthly expenses you require and then narrow down the amount which you can spare towards payment of debts. All you need to do after this is to follow it strictly until the entire amount has been completely repaid.
Prioritize and re-pay the high interest loans first:
If the high interest loans are not paid off first, they might grow to become a monstrous loan which becomes highly difficult to pay. Among the high interest loans are Credit card debts which are the worst as their interest varies between 36 to 42 percent per annum followed by personal loans with interest rates of 20 percent per annum. Some loans can be paid off with a little worry such as home loans, National savings Certificate(NSC), loans against insurance, mutual funds, fixed deposits because by the time they mature, a person can square off the loans.
Try convincing the lenders for onetime pay off:
If the bank or the lender allows the defaulter to settle all the dues in one shot, the person should primarily look at squaring off all primary high interest loans.
Ask Banks to revise and restructure your loans:
If one – time settlement is not possible, send a letter to the bank informing them of your current financial situation mentioning the money you need to pay off. Provide a clear idea picture to them about your net salary and request the bank to restructure your loan. The banks based on your condition will restructure the loan, wherein higher EMIs are charged as and when the financial position of the borrower improves.
Declaring insolvency:
In worst case scenario, if a person has lost all his money, the only way out is filing a petition of insolvency. The person has to go to the bank and declare himself bankrupt. The court takes over all the person’s assets and liquidates them to repay the lenders. But this is a complicated procedure which may take up to three years as the court performs a thorough diligence on the person’s financial position.