We Stand Together(4)

Over-indebtedness in Europe: are citizens taking all the risks?

On the 4th of September, Eurofound held a workshop entitled “Addressing household over-indebtedness: debt advice services and debt settlement procedures in the EU” . The event was an opportunity for a variety of speakers and stakeholders to provide feedback and input to the draft report.

Household over-indebtedness is a complex issue, but is critical when addressing poverty and social exclusion. Over-indebtedness can be caused by poverty, which often leads to exacerbating the problem. The paper aims at improving policy responses to over-indebtedness by providing policy makers with insight into over-indebtedness and how best to address it.

Some of the key findings of the report include:

  • A slight decline in debt problems in the EU;
  • An increase in arrears for single parents since 2016;
  • A wider availability of debt advice services but highly unequal throughout the EU;
  • A convergence in debt settlement procedures in the EU;
  • A challenge to tackle poverty and depravation even after debts have been written-off through debt settlement procedues.

Some of the policy recommendations include:

  • Failure to address over-indebtedness comes at great cost for society and public expenditure (healthcare, unemployment and inactivity in general);
  • Even with an increased interest of policy makers through the set up of prevention mechanisms, better access to debt advice and debt settlement procedures, gaps remain and need to be filled;
  • The scope of over-indebtedness should go beyond mortgage/consumer credit and should include utility bills, telephone bills, healthcare etc ;
  • Self-employment presents a challenge as it is hard to distinguish between private and professional debt.

COFACE-Families Europe was represented by Martin Schmalzried, and raised the following points:

  • With regards to debt settlement procedures and full discharge, there is still a lot of stigma placed on debtors and resistance to the principle of a fresh start. Many over-indebted people are treated as if they acted irresponsibly when in a vast majority of cases, their situation is due to life accidents which can happen to anyone. The most important argument against an easier and more accessible debt settlement procedure is that of “moral hazard”, the fact that people will take out loans on purpose with the intent of not repaying, even if there is no evidence to support this argument. COFACE-Families Europe is in favor of much faster and accessible debt settlement procedures as the benefits greatly outweigh the costs. The cases in which debtors would borrow with the intention of not repaying should be treated in the same way as “false claims” in insurance fraud. Also, it is important to underline the irony in the obligation of debtors to reimburse their credit should they default on their loan. Indeed, the banks price the loan depending on the consumers’ risk. This means that the bank should have already priced in the likelihood of a consumer of defaulting, within a certain risk pool. In other words, asking people that default on their loan to repay nonetheless is the same as if you paid for your car insurance, but still had to cover for the costs of an accident.
  • COFACE-Families Europe also invited Eurofound to enlarge their macro-economic examination of the problem of over-indebtedness and the role private debt plays in the economy. Indeed, private borrowing is directly linked to economic performance. The work of economist Steve Keen, in this regard, is crystal clear: the level of private borrowing is correlated closely to unemployment. When people borrow less, unemployment goes up (which also impacts default rates). When people borrow more, unemployment declines. In other words, one major factor in determining whether people will be able to repay their loan is the propensity of people to borrow in the future! The fact that regular citizens borrow is directly linked to the overall health of the economy. Yet it seems that citizens take all the risks. This calls for regulation which protects citizens in case of default.

For more information about the event, contact Martin Schmalzried: mschmalzried@coface-eu.org

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