Caught in a debt trap? Here’s how you can get out of it

medium119465214When Mumbai-based Shikhar Awasthi* first tried his hand at trading in futures and options in 2022, the initial profits made it look easy. Awasthi was lured into equity markets after the Covid market crash and the subsequent euphoria. He started investing more. But soon he realised that making money from derivatives is not that easy. Awasthi made losses to the tune of ₹3.5 crore. Desperate to bail him out, his mother borrowed money from small-time money lenders. But when Awasthi couldn’t repay the debt, he was arrested. He served four months in jail.Awasthi is one of many who have fallen into debt traps, leading to financial and personal ruin. His case, which ended in imprisonment, may be extreme, but bad debt can spiral into a financial crisis that takes months, even years, to escape.Easy money trapsConsumer debt in India is surging. A report by Blume Research shows that consumer loans have risen from 21% in 2016 to 34% in 2024, with the trend expected to continue. A key driver is the easy availability of credit, often extended by non-banking financial companies (NBFCs) and instant loan apps, even to individuals with low credit scores.However, many borrowers find themselves trapped in cycles of debt, struggling to repay and ultimately defaulting, highlighting the growing risk of unchecked lending practices. The Fintech Barometer, published by CRIF High Mark and the Digital Lenders Association of India, reported a 44% surge in delinquency rates among personal loan borrowers who took loans between December 2023 and June 2024.What is even more concerning is that more than 50% of these loans are unsecured. Despite the importance of maintaining a healthy credit score, many borrowers accumulate bad debt, often unaware of the long-term repercussions. A poor repayment history can severely limit access to credit when it is needed the most, turning financial missteps into lasting setbacks.“Debt isn’t always bad, but most people fall into a trap because they don’t realise how debt behaves,” says Sudhir Khot, founder of Financial Fitness. As a financial coach, Khot gives guidance to people on how to improve their relationship with their money, how not to fall into debt and how to manage their money better. medium119465250Not creating safety netsDhule-based businessman Jagdish Bhagat made a living selling computers. In 2013, torrential rains led to floods that destroyed his inventory worth ₹18 lakh in a single day. To repay his suppliers, Bhagat borrowed from moneylenders. As his income took a hit, he relied on credit cards to cover expenses, pushing him deeper into debt. That’s when things took a turn for the worse.To pay off his credit card debt, Bhagat began using other credit cards. He swiped his card with small-time merchants in his town, who recorded fictitious sales and returned the money to him in cash. These shopkeepers typically deducted expenses such as goods & services tax (GST) and their own commission of 1.5-2%. Bhagat used this cash to pay off his first credit card bill. To cover the bill for the second card (which he had used to generate cash), he repeated the process with a third card — and so on.“My biggest mistake was never opting for insurance, as it wasn’t common in our circle,” he admits.Ritesh Srivastava, founder of FREED, a debt relief platform, says, “This approach is not only illegal but also highly risky, as it creates a cycle of escalating debt rather than resolving the problem. In countries with more advanced credit systems, lenders actively monitor spending patterns and adjust credit limits dynamically, making it harder for borrowers to rely on such tactics. In India, however, the lack of such safeguards allows people to fall deeper into debt before intervention happens.”Mohak Jeenwal, an entrepreneur running government skill training programmes, had invested a significant portion of his capital in expanding his business and building his team. To raise funds, the 58-year-old sold his land. However, when a major project was abruptly shut down, Jeenwal was left with a debt of ₹4.5 crore. “I became irritable. My children thought I had been reckless,” he says.A major mistake that business owners such as Jeenwal make is not saving from the profits they make. “Whatever they make, they reinvest it into the business. They should at least save and invest 10% of the amount to build an asset and a safety net,” says Khot of Financial Fitness.“He grew up in poverty and believed that money was the only way to gain respect. That belief drove him to take excessive risks,” explains Hamida Rashid, chief psychologist at With You, who is helping Jeenwal through counselling.Not every debt trap is the result of an unforeseen crisis. Sometimes, it just happens due to irresponsible financial behaviour.Borrowing for lifestyleBengaluru-based business analyst Divya Kukreja, 29, was living beyond her means, spending more than she earned. With an annual income of ₹11 lakh, she soon found herself buried in debt, owing nearly ₹36 lakh. Fancy lunches with friends, lavish holidays, latest iPhones — Kukreja was drawn into the allure of the glamorous lifestyles she saw on social media.Her troubles deepened when she invested in a friend’s business venture without much thought. The business failed, but the debt remained. To maintain her lifestyle, she took multiple loans — gold loans, personal loans, buy-now-pay-later schemes — and piled up high-interest credit card dues.Kukreja’s story isn’t unique. Many young people borrow to fund vacations and lifestyle expenses, ignoring the importance of goal-based savings. The ‘life is too short’ mindset often leads to impulsive financial decisions. But experts warn that borrowing for instant gratification comes at a high cost.“Saving regularly for a goal, such as a vacation, is a far healthier financial habit than taking loans for instant enjoyment,” says Shilpa Bhaskar Gole, founder of Nerdybird Financial Wellness. medium119465305What’s the way out?That’s the big issue, and there are no easy answers. Debt relief isn’t a magic wand, says Srivastava of FREED, emphasising that those in debt must start saving consistently. You can either attempt to pay off your debts independently or seek help from debt counsellors, who assist in clearing debts for a small fee.Both Kukreja from Bengaluru and Bhagat from Dhule began repaying their debts, tackling one small loan at a time. This approach, known as the snowball strategy, involves paying off smaller debts first before addressing larger ones. Jeenwal proudly shares that he has been debt-free for six years, with his computer business back on track.Kukreja opted for loan restructuring to manage her repayments. “Had I planned better and saved first, I wouldn’t be in this situation,” she admits. By consolidating ₹21 lakh of her debt, she has reduced her EMI burden, making repayments more manageable and gaining better control over her finances.However, Aparna Ramachandra, founder of Rectifycredit, warns, “Be cautious with debt relief counsellors — many claim to consolidate debt without security. But in reality, most consolidated debts are asset-backed.”For those who cannot manage to come out of their debt on their own, debt counsellors are there to help. A big part of a debt counsellor’s role is to help you create a moneybox by working with you to save up a little each month. If you stay disciplined with this approach, you can systematically pay off your debts one by one.Debt counsellors also have a better hand in negotiating with lenders to help you settle your debt. If, for instance, you owe your bank ₹10 lakh, but can only pay ₹7 lakh, debt counsellors engage with banks to settle the debt and write off the remaining. Keep in mind that there are no guarantees, and a complete write-off doesn’t usually happen. The menacing calls — and even visits to your home or office, from recovery agents can stop though, if you show intent to pay up your debt and your debt counsellor conveys this to your lender.To be sure, if your loan delinquency exceeds 30 days, your case is transferred to recovery agents who will then start calling you to pay up.Satish Mehta, former MD of CIBIL and now founder of credit repair firm Athena CredXpert, warns, “Persistent delinquency hurts your credit score, even if part of the debt is written off.”You have got to pay upIf you are struggling with unmanageable debt, there are several repayment strategies you may explore. But if you are hoping for a legal way out through bankruptcy, the reality is grim.“There’s no structured process for individual insolvency under the Insolvency and Bankruptcy Code (IBC) yet,” explains Raheel Patel, partner, Gandhi Law Associates. “It involves proving insolvency, liquidating assets and possibly getting a discharge order, but the process isn’t efficient.”While the IBC does include provisions for individuals (under Part III), they haven’t been codified yet. So, for now, individual bankruptcy remains a complex and outdated process, offering little clarity or protection. In simple words, you cannot throw your hands up in the air and say that you cannot pay.However, if your debt is tied to a business loan taken in your company’s name, the company can file for insolvency under the IBC through the National Company Law Tribunal.Debt can spiral out of control quickly, but with the right strategies, regaining financial stability is possible.*Name changed to protect identityLead illustration: Zahid