In principle, the term over-indebtedness describes a condition in which the debtor has become so indebted that the debts of the debtor exceed the assets of the debtor. This means that the state of over-indebtedness does not necessarily mean a permanent insolvency of the debtor, but that the current assets are smaller than the debt.
Over-indebtedness and debts in general
In general, different people and institutions can be over-educated. The sword of Damocles of the risk of over-indebtedness therefore basically depends on any economic subject who can get into debt or make use of this possibility. These include, in particular, households, enterprises and the state as well as the subdivisions of the latter.
Debts as such are not fundamentally negative. Debt is an important part of the economy. Debt as a form of borrowing enables investments that can generate innovation and, subsequently, economic growth, which then increases the overall prosperity of the region under consideration. Nonetheless, debt becomes a problem when the debt burden becomes too great. Accordingly, over-indebtedness as such, in companies, already constitutes a reason for the opening of insolvency proceedings. This is regulated in § 19 of the Insolvency Regulation (InsO). It states in § 19 (2) sentence 1 InsO: “Over-indebtedness exists when the assets of the debtor no longer cover the existing liabilities, unless the continuation of the company is predominantly probable under the circumstances”
Reasons for over-indebtedness
One of the major factors in overburdening debts is that the debt-financed investments do not have the desired effect, leaving the debt incurring little or no revenue. Other factors that cause debts to exceed assets are possible asset value losses and exponential increases in debt due to interest rates and the associated interest-rate effect. The latter exponential growth of debt and the concomitant need for new debt to cover the old debt is also popularly referred to as a “debt trap” and contributes to the negative connotation of debt in the population.
The over-indebtedness of private persons
In contrast to companies, a debt burden that exceeds the assets, ie an over-indebtedness, does not constitute a reason for opening insolvency proceedings. For this, the (imminent) insolvency only has to occur. However, as insolvency proceedings usually entail considerable curtailment of the ability of a debtor to dispose of his assets, insolvency proceedings should really be seen as a last resort.
It is better, with the determination of the over-indebtedness or ideally still before, if one notices that the value of the debts more than that of the property rises, to consult a debt counseling. They are on hand to help and advise on other legal options and obligations.