Over-indebtedness
Technically, a situation of over-indebtedness arises when a person is unable to meet their debt repayments in a regular and timely manner, even when taking into account their expected income over the next twelve months. Let's look at how to reduce the risk of this happening, what to do if you're struggling to keep up with repayments, and how to deal with over-indebtedness if it occurs.
How to reduce the risk of over-indebtednesso
To avoid becoming over-indebted, it's essential to plan your finances carefully and compare different credit offers before taking out a loan.
1. Plan ahead
Before applying for credit, assess whether the repayments will be manageable. In other words, consider whether your income is sufficient to cover all your existing and potential loan instalments over time. This includes smaller loans too, which can still have an impact on your overall financial situation.
A useful general guideline is to keep total loan repayments within 30 per cent of your stable net income-excluding bonuses, overtime, or irregular earnings.
It's important to carry out this affordability check not only when taking out a new loan, but also periodically, so you can react promptly if you notice early signs of financial strain.
If difficulties do arise, speak to the bank that granted you the loan about possible solutions.
Don't forget that banks and financial intermediaries also have a responsibility to help prevent customers from falling into over-indebtedness. Before granting a loan, they are required to assess your creditworthiness-that is, your ability to repay the debt-by considering factors such as your income, existing financial commitments, and the purpose of the loan. This helps ensure that the loan is appropriate for your needs and your financial circumstances.
2. Compare offers
Just like with any other purchase, it's important to compare different loan offers to find the one that best suits your needs and is the most cost-effective. You can use the information sheets provided by lenders-known as ESIS (European Standardised Information Sheet) for mortgages and SECCI (Standard European Consumer Credit Information) for consumer credit-as well as comparison websites.
One of the most important features to consider is the APR (Annual Percentage Rate of Charge, or TAEG in Italian). This tells you the total cost of the loan per year-including interest and other fees-as a percentage of the amount borrowed
What to do if you struggle to repay your loan
If you're having difficulty keeping up with your loan repayments, it's essential to contact your lender as soon as possible. The bank that issued the loan can help you explore possible solutions. Supporting you in maintaining regular repayments is also in the bank's interest-and in the case of loans secured by property (such as mortgages), the bank is legally required to assist customers in financial difficulty.
The sooner you inform your bank of any repayment issues, the more likely it is that a workable solution can be found.
There are several options available to help you manage the situation.
- Renegotiation - You can ask your bank to renegotiate the terms of your loan agreement. For instance, you might request to extend the repayment period, which would lower the monthly instalments. Keep in mind, however, that this usually means paying more interest over a longer time.
- Temporary suspension of repayments - You may be able to temporarily suspend your repayments. Be aware that this often comes at a cost: once the suspension ends, you'll have to pay the additional interest that accrued during the break, and your overall repayment schedule will be extended beyond the original end date.
- Refinancing - You can take out a new loan to repay one or more existing loans that you are struggling to manage. This refinancing can be either partial or total.
For first-home mortgages, there may also be access to public support measures if you meet certain conditions-such as losing your job.
In theory, you always have the possibility to transfer your mortgage to another bank offering better terms. However, this option-known as portability (or surroga in Italian)-is generally more difficult to pursue if you're already in financial distress.
WHAT HAPPENS IF YOU MISS A REPAYMENT?
If you fail to pay an instalment-either in full or in part-for more than 30 days, the bank or financial intermediary is required to inform you of the consequences of missed payments. These may include, for example, default interest charges or the loss of ownership of a mortgaged property. They must also inform you of any support measures that may be available, such as public assistance schemes or other initiatives.
Keep in mind that default interest is added to the amount already owed, increasing the overall cost of your debt. Another important consequence of missed or late repayments is that this information is recorded in credit reporting systems. These include the Centrale dei rischi, managed by Banca d'Italia, and private credit databases such as CRIF.
In more serious cases of non-compliance with contractual obligations, you may be classified as in default ('a sofferenza') in these databases. This status can severely affect your ability to access new credit in the future. The bank is obliged to notify you in advance the first time it reports you as a 'bad payer' to any of these credit registers. This notification is usually provided along with payment reminders, or in a separate communication.
In such cases, you have the right to access the information held about you in these databases, have your information treated confidentially and request corrections if any data is inaccurate. Accessing your data stored with the Centrale dei Rischi is free and straightforward. The easiest way is through the Banca d'Italia online service portal.
What to do if you are over-indebted
If you find yourself in a situation of over-indebtedness, the law provides specific procedures-under certain conditions-that can help you restructure your debts and make repayments more manageable. These procedures also ensure that you are supported by an independent and impartial expert throughout the process. To access these measures, you should contact your nearest Over-Indebtedness Crisis Resolution Body (Organismo di Composizione della Crisi da Sovraindebitamento – OCC).
A full list of authorised OCCs is available on the website of the Italian Ministry of Justice. The OCC will appoint a qualified expert who will assist you.
Remember
The law is designed to support people who are no longer able to repay their debts-even in situations that seem hopeless and are not the result of any wrongdoing on their part. If you are in this situation, speak to your bank as early as possible. In more serious cases, you can turn to an OCC to access the legal procedures made available for over-indebted individuals.
Never turn to unlicensed lenders. Avoid at all costs anyone offering loans without proper authorisation or registration with the official registers established by law. Turning to illegal lenders puts you at serious risk of usury-that is, being charged excessively high and illegal interest rates. These practices are not only unlawful, but they can make an already difficult financial situation far worse.
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