2024-08-01 09:48:31
Read the story of Ana, an Ecuadorian woman who, due to unforeseen medical circumstances, accumulated debts until she could no longer pay them. Two experts suggest what to do.
Ana (who asked that her last name be withheld) is deeply in debt. In 2016, she bought a house with a 20-year mortgage and in early 2023, she bought a car, also on credit, with a five-year term.
But since the beginning of 2022, he has been accumulating expenses for unforeseen medical treatments, which skyrocketed at the end of 2023, when he had to travel to Colombia in search of a better diagnosis and treatment.
All of this increased their level of indebtedness, undermined their income and made it increasingly difficult to pay their debts.
Finally, in August 2023, her son, barely a month old, fell ill and Ana had to take out a new loan to cover the clinic’s expenses, leading her to over-indebtedness.
As the situation became increasingly difficult, he decided to pay his lottery tickets and reserve funds monthly. To reduce expenses, he rented out his house and rented a cheap place. Despite this, the income was not enough and every month a snowball began to form.
At first, she used her savings to avoid falling behind on her loan payments, but three months ago that fund ran out and she could no longer pay the full installment of one of the loans.
What brought you to this financial situation and, above all, how can you get out of this crisis? The solution is not easy and will take some years to resolve.
First things first: do the math
Ana authorized PRIMICIAS to present her case to two experts, who analyzed her situation and made recommendations. The first thing we asked Ana was to put her income and expenses in black and white:
Visualizing your income and expenses in a template like the one proposed by experts is a task that allows you to better identify expenses that can be reduced and debts that need to be refinanced.
In Ana’s case, she earns USD 4,132 per month, but her expenses are USD 5,545 per month. That is, she needs USD 1,413 to make ends meet.
How to know if there is over-indebtedness
Furthermore, the analysis shows that Ana has six loans and is over-indebted. This is because a person can only commit 40% of their income to pay debts, but in her case she committed 92% of her income. That is, she could go into debt for a maximum of USD 1,652, but she has five loans with banks and cooperatives, whose installments represent a total payment of USD 3,835 per month.
That is, almost all of his salary. And what he has left does not cover all his expenses, such as rent, food, utility bills, gasoline. The total outstanding balance of the five loans amounts to USD 183,469.
The highest installment is to pay a consumer loan for USD 64,933 that she took out for one of her medical treatments, which also has the highest interest rate of 16%. The monthly installments on that loan are USD 1,506 per month.
Although the amount is very high, the loan is for a medium term, 7.5 years. She thought she could pay it, but new medical expenses came up, which complicated her financial situation. All of this has put her in a very stressful situation, says Ana. She adds that managing personal finances is not something they teach, even though it is a fundamental part of your daily life.
What is the way out?
To avoid what happened to Ana, Crisfe’s Financial Education expert, Henry Ortiz, explains that clients should make a projection of income and expenses throughout the life of the loan. Thus, for example, if you obtain a mortgage loan and it already involves 40% of your income, you should try not to get into more debt, so that you have room to even save and generate an emergency fund or to acquire a new asset, such as a car.
In other cases, families do not take into account circumstances such as illness or the change of school or college for their children, which can increase household expenses and throw their budget out of balance. “You have to make a projection of income and expenses for the entire term of the loan, not just the moment in which it is acquired,” says Ortiz.
In some, you may be able to access a grace period. But before granting it, the institution will carefully analyze the person’s financial situation. Some entities require that you pay off your overdue payments in order to restructure the debt or pay part of the capital, between 25% and 50%.
Solving the crisis takes time In Ana’s case, she asked for a restructuring of the loan for which she was paying the highest monthly payment, USD 1,506. The cooperative gave her a year of grace and extended the term from 7.5 years to 15 years, which lowered the payment to USD 1,000, so she will end up paying more interest.
She will therefore still have to take steps to restructure the remaining loans, or part of them, that she has with other financial institutions.
César Coronel, a lawyer at the law firm Defensa Deudores.ec, says that what is clear is that Ana should not take on new debts for many years because she no longer has the financial capacity to do so.
Coronel says there are some cases of clients who definitely cannot pay and face debt collection lawsuits. Within these processes, clients can manage to sign a payment agreement, which may include forgiveness of interest and even part of the principal.
But that would mean a significant loss of points in the credit bureau, which would damage their risk profile, a situation that would probably prevent them from accessing a credit card or new loans in the future. “Although, given their situation, this type of client should not take out more credit,” explains the expert.
By: PRIMICAS