Vesa Muttilainen Elisa Valkama National Research Institute of Legal Policy
SUMMARY
Research Communications no. 56
THE PROGRAM FOR VOLUNTARY DEBT SETTLEMENT – EXPERIENCES AFTER ONE YEAR The focus of the study and material involved
The status of debtors facing debt problems has improved considerably since the early 1990s. The act on debt adjustment (Act 57/1993), debt counselling services and a number of other reforms have assisted debtors to manage severe debt problems. Notwithstanding, there are debtors who have failed to get relief. In spring 2002 the government and creditors agreed on a program for a voluntary settlement of debts to assist debtors who, since the economic depression of the early 1990s, have faced problems in paying their debts. The program involves a voluntary agreement aimed at improving the position of these debtors, applying the rules established in the act on debt adjustment. The target group for the debt-settlement program is debtors and guarantors whose debt problems derive from the years 1990–1994. The program involves bank creditors, collection agencies and also some other creditors. It is up to the creditors to initiate the procedure. A letter proposing a settlement of the debts is sent to all debtors belonging to the target group. If a debtor applies for a voluntary settlement of the debts, the main creditor works out a settlement for the debtor, involving all his or her creditors. The study examines the implementation of the debt-settlement program during its first year. Focus is placed on how widespread such cases have been, as well as the position of debtors and the content of the agreements that have been reached. The empirical parts of the study are based on creditors' statistics and on specific material concerning cases that creditors have settled (n=95).
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The number of debt agreements
During the first year of the debt-settlement program banks and collection agencies addressed a letter proposing a debt-settlement to 73,000 customers facing problems in paying their debts. During this same period 13,000 debtors responded by contacting their creditors. During its first year, this program has resulted in a debt-settlement for 1,700 debtors. The program also contains a lighter procedure for debtors facing the most severe debt problems. During this first year, 800 debtors sought such a solution, resulting in 300 agreements. In this procedure, the social authorities issue a statement concerning a customer's lacking ability to pay, the intention being that the creditor should forgive the debtor his or her debts.
The position of the debtors
The background and economic position of those debtors who have applied for a settlement of their debts are similar to those who have obtained an adjustment of their debts in court, and also other debtors who have been faced with severe debt problems. However, because the settlement program is tailored for debt problems that derive from the years of the depression, this gives the composition of the debtors and their situation some specific attributes. Among those applying for a settlement of their debts, six out of ten are men and the rest are women. The debtors have reached a fairly mature age, the average age exceeding 50 years. Less than half of them are couples, most of them married. The share of single persons is also less than half of all the debtors. The rest are single parents. The debtors are fairly evenly divided between those whose debts are related to business and those who do not have this linkage. For those who have a linkage to business, the debts ordinarily derive from an own business activity that has come to an end. At the time of the application for a debt-settlement, almost half the applicants had a salaried employment. One forth was retired, one fifth was unemployed and less than 10 per cent were entrepreneurs. The debtors had an average net income of EUR 1,000 a month. After indispensable costs were deducted there was typically EUR 130 left of the monthly income for managing the debts. The average amount of the debts is EUR 45,000 spread among an average of four credit agreements. The debts are primarily made up of consumer credits, business loans and guarantees. The debts involve two to three
57 creditors, mostly banks. Part of the debts and the debt relationships were left outside the debt-settlement. In each second case, only one debt was adjusted. Four debtors out of ten have approached their creditor as a follow-up of the letter sent by the creditor, and six debtors out of ten have initiated the process in other ways. More than half the debtors received assistance with their application either from a debt counsellor or a lawyer. The duration of an application for a settlement of the debts is approximately four months. Creditors have rejected about one sixth of the proposed settlements. If a case involves several creditors the share of the rejections is multiple compared to cases involving only one creditor. The settlement normally results in a payment plan. The duration of such a plan is usually five years. Some debtors pay their debts as a lump sum. All in all, five debtors out of six pay at least part of their debts. For one sixth of the debtors the settlement implies a so- called zero program. For a total of three debtors out of four the amount to be paid has been reduced, at least in part. Through this process for settling debts, creditors have obtained payments from their debtors amounting to EUR 6,700. Debtors are able to pay about one tenth of all their debts and one sixth of those debts that have been adjusted. The payments accrued are fairly evenly divided between debts associated with business and other debts.
Conclusions and discussion
1. Information retrieved from statistics concerning the settlement of debts indicates that the quantitative goal of the program has not been achieved in the way this was assumed by the parties. Only a small minority of the debtors, who had received a letter concerning the settlement of their debts, has contacted the creditor. In addition, a settlement has as yet been approved only for a few per cent of the debtors, for whom the program was targeted. On the other hand, the program has attained many other debtors than those who received a letter from their creditors concerning a voluntary settlement of their debts. 2. The debt-settlement program has revealed many problems that also earlier have proved to be specific to voluntary means of settling debt problems. It is often difficult to obtain a solution that satisfies everybody when several creditors are involved. In cases involving several creditors the percentage of rejected proposals are multiple compared to cases that involve only one
58 creditor. Another problem in deciding on an adjustment of debts is that in every second case at least some debts have remained outside the settlement process. 3. The program for a voluntary debt-settlement has brought along only minor substantive features that are unique to this new process. However, in the process involving a lighter procedure a new emphasis can be seen in the intention that creditors forgive debts. A lacking ability to pay is in this process confirmed by the authorities without extensive investigations. The debtor is immediately discharged of his or her debts, avoiding thereby a payment plan that extends over several years. 4. The debt settlement program defends its place as a temporary experiment, but not as a permanent solution to severe debt problems. It cannot be seen as a desirable state of affairs that new systems for assisting debtors are constantly devised, which to their substance resemble one another. Such a development might even confuse debtors and work to the disadvantage of those who have problems with their debts.