Insolvency, it’s when you’re over-indebted and there is virtually nothing more that can be taken from you to repay your loans. From the 23rd of March until the 16th of June, the European Commission gathered opinions on whether there is a need to provide minimum standards for insolvency all over Europe for both SMEs, micro-entrepreneurs and perhaps also individual consumers. This is a big deal for consumers as in many European countries, there are no insolvency laws, which means that consumers are left at the mercy of debt collection companies, which try to squeeze every last cent from people who have nothing more to give. And this can go on for years and years.
COFACE responded to the consultation in partnership with EFIN (European Financial Inclusion Network) which coordinated the joint answer. COFACE is strongly in favour of European wide minimum standards for insolvency.
First of all, let’s talk about responsibility. While many might assume that consumers “reap what they sow” and that they should pay for their “mistakes”, when looking at the reasons behind over-indebtedness, studies show that people fall further into debt mainly because of life accidents such as loss of employment, health-related accidents, divorce, and only a small proportion is linked to irresponsible behaviour such as overspending. Add to that the issue of irresponsible lending or even predatory lending and you quickly understand that most of these over-indebted borrowers have done nothing fundamentally wrong.
In order for the EU to set minimum standards for insolvency laws, there needs to be a European dimension to the problem. EFIN gathered a number of examples to that end which include situations of over-indebted consumers moving to another European Member State, consumers taking out loans from banks in other European Member States, or consumers living close to the border. So long as there are cross-border issues with insolvency, the EU has a mandate to act.
Some may argue, however, that insolvency laws could be dangerous for banks. If we allow people to simply erase their debts and start fresh, wouldn’t banks lose a ton of money and go bankrupt themselves? Well, no. First, researchers tend to show that no matter how much you try to squeeze out of an over-indebted person, you will barely get enough out of them to cover for the administrative fees to harass them. Second, most banks get rid of their debt anyways by selling it with a huge discount to debt collection companies. For instance, imagine you owe a bank 10.000€ and you can’t pay it back. The bank sells the loan to a debt collection company for a 1000€ to get rid of the “bad loan” or as it is called a “non performing loan” to improve their books. While debt collection practices are subject to strict ethical practices, their application varies greatly from one Member State to another.
The benefits of having minimum standards for insolvency in Europe are many. Such laws would fix the administrative and legal mess generated from cross-border insolvency cases, creating legal certainty for judges, lawyers, creditors and borrowers. But there are associated benefits to such action which are potentially huge.
First, there are many countries where there are no insolvency laws, so a European law would finally enable over-indebted borrowers to get rid of their unpayable debt and start fresh.
Second, since in many cases the only money you can get out of over-indebted people with no further assets, barely covers the operating costs of debt collection companies, you may as well allow these people to go through an insolvency procedure.
And third, since growth is seemingly the European Commission’s answer to every problem nowadays, such a law would greatly contribute to economic growth.
In a conference focused on the topic of insolvency attended by COFACE last May, several speakers underlined that over-indebted people with no means to repay their debt often drop out of the labour market due to a lack of motivation. What’s the point in working your butt off if all the money you make is used to pay back a debt so huge you won’t even repay it by the time you die?
This results in a huge waste of potential and clear monetary loss in terms of tax revenue for the state, diminished consumption since these people live with the bare minimum and loss of productivity by discouraging these people from returning to the labor market.
The European Commission will soon publish the results of its consultation and we certainly hope that it will support the idea of setting minimum standards for insolvency.
For more information, see the EU Commission’s website
COFACE’s response to the consultation on an effective insolvency framework within the EU is available here