The correct option is 1 and 3 only.
Explanation
A Debt Trap is a situation where a borrower is led into a cycle of re-borrowing or rolling over loan obligations because they are unable to afford the scheduled payments on the principal and interest. This concept applies to both individuals (e.g., farmers in rural credit) and nations (sovereign debt).
Statement 1 is Correct: A debt trap occurs when credit pushes the borrower into a situation from which recovery is very painful. The borrower becomes legally obligated to repay but lacks the liquidity or income to do so, creating a vicious cycle of distress.
Statement 2 is Incorrect: A debt trap is most likely to occur when the borrower has an unstable, low, or risky income (such as a farmer dependent on monsoons). If a borrower has a stable and high income, they can sustain debt servicing without falling into a trap.
Statement 3 is Correct: To exit a debt trap or satisfy creditors, the borrower is often forced to sell a part of their assets or land. This liquidation of productive assets reduces the borrower's future income-generating capacity, often leaving them worse off than before.
Key Takeaway: A debt trap arises when repayment obligations exceed the borrower's capacity to pay from current income, often necessitating the sale of assets or fresh borrowing to pay off old debt.