Assessing responses to the treatment of over-indebtedness

1. Professor Iain Ramsay Seminar on Overindebtedness Brussels November 20 2009 Assessing responses to the treatment of over-indebtedness

2. Focus • Policies for the treatment of overindebtedness • Focus on debt adjustment and insolvency law • Lessons from existing experience: contrasts in approaches: policy issues for future • Recognition that in EU prevention is also an important goal e.g. advice and counselling, financial literacy, responsible credit practices and arrears handling, use of credit data. View, Master, Slide Master to change this text to the title of your presentation

3. Development of Debt Adjustment Laws • 1984 Denmark introduces debt adjustment law • 2005 15 Member Stateswith debt adjustment laws • By 2009 additions included Czech and Slovak Republic, Estonia, Poland, Latvia, Slovenia, Hungary in draft, Ireland proposed reform. • First generation, second generation laws. Continuing modification e.g. France, England & Wales 2009.

4. The rise ofconsumer insolvency • “Twenty years ago an academic book about consumer bankruptcy systems around the world would not have been possible. Most countries did not have a consumer bankruptcy system...” J. Niemi, I. Ramsay, W. Whitford Consumer Bankruptcy in Global Perspective (2003) at 1. • “Insolvency procedures for consumers have become more common in different parts of the world.” J. Niemi, I.Ramsay, W.Whitford, Consumer Credit, Debt & Bankruptcy (2009) at 6.

5. Household Indebtedness 2000/2006 as % of disposable income [From Laeven&Laryea, 2009]

6. Debt adjustment laws in new member states • Generally the idea of “earned fresh start” • Require repayment plan--usually 5 years until discharge • Court based • Poland only permits for social force majeure e.g. illness, involuntary unemployment. Latvia also has conduct controls on entry. • Concern about impact on payment morality View, Master, Slide Master to change this text to the title of your presentation

7. Issues in evaluation and policy making • Evidence based policy in credit and debt • Not much systematic analysis of debt adjustment processes e.g in terms of experiences of debtors, longitudinal impact. • Are debtors rehabilitated, reintegrated? • Law in books/law in action • Problems of comparative analysis: different institutions, effect of different welfare systems etc.

8. The Trouble with Statistics: Consumer Insolvency 1998-2008 View, Master, Slide Master to change this text to the title of your presentation

9. Per 10,000 Capita Insolvency Filings 2002,2008 [source Gerhardt, 2009: OSB Canada] View, Master, Slide Master to change this text to the title of your presentation

10. Evaluating Debt Adjustment Plans • Braucher (2009) outlines 3 criteria • Creditor repayment net of administrative costs • Rates of discharge • Treatment • Rational sorting

11. Objectives of treatment • Minimisation of overall social costs of credit • Costs of processing • Debtor costs • Creditor costs • Third party costs • Effects on credit granting • Error costs by decision makers

12. Policy Factors • “Consumer bankruptcy is generally a small stakes game” (Niemi, Ramsay, Whitford 2003 at 11) • Increasingly large numbers of individuals to be processed • Significant number of NINAs and LILAs: simplification • Administrative/judicial model • Routinisationv. Individualisation: discretion within system • The role of intermediaries: rational sorting of different debtors

13. EU Study on Overindebtedness(2008) • Link to amicable procedure to reduce cases going to court • Unrestricted access • Compulsion on lenders to participate • Oversight of payments by a trustee or mediator, with an appropriate balance between support for debtors and ensuring strict adherence to repayment plans • Realistic payment levels • No more than 5 years + debt write off • Total debt write off for those too poor to repay • Assistance with money management View, Master, Slide Master to change this text to the title of your presentation

14. Models of repayment plan • Germany---”earned” fresh start through payment plan. • Scandinavia---limit access to “permanently insolvent”, may be moral judgment, provide counselling. • French model: overindebtedness commissions • England and Wales---mixture of public and private alternatives • Many European laws [e.g. Germany, Netherlands] require initial attempt atnegotiatedsettlement • German and Scandinavian model have influenced new member statese.g. Poland, Latvia. Fear of undermining payment morality.

15. Germany • Attempt at negotiated settlement through statefinanced debt advisors: delays • No reliable statistics on performance of agreements. • If no agreement then plan: six year “good behaviour”. • 80% pay nothing [Backert 2009]

16. France • Overindebtedness commissions + courts. Process financed by state • Amicable settlement must be approved by “principal creditors” • Limit on repayment plans of ten years. [2007 data indicate 46% over five years] • Moratorium of two years [1998] + partial discharge • Discharge after one year if “irredeemably compromised” [2003] View, Master, Slide Master to change this text to the title of your presentation

17. Bank of France 2008 • 188,485 applications • 159,967 accepted • 87, 673 amicable plans • 37,668 plans approved after application to judge • 33,378 Rétablissement personnel. These have increased from 16,321 in 2004 • Bank of France data (2007) indicate that 35% have no repayment capacity and a further 42% have less than €450. View, Master, Slide Master to change this text to the title of your presentation

18. France • Concerns about delays in procedures for bankruptcy-- requiring judicial involvement; role of judges: quality of representation on the commissions. • Discretion and “local culture” e.g. in establishing the “resteà vivre”, determining access to rétablissement personnel • Gloukoviezoff (2008): Kilborn (2005)

19. 2009 French proposals • Possibility of rétablissement personnel without necessity of judicial liquidation where no assets. Commission makes recommendation. • Automatic stay of creditor action from when Commission accepts file. • Greater power on Commission to impose solutions on parties without intervention of judge (but not partial or total writedowns) • Reduce period for determining the reception of the dossier by Commissions from 6 to 3 months • Reduce the period of inscription on the FICP from 8 to 5 years View, Master, Slide Master to change this text to the title of your presentation

20. France • Move towards administrative processing • Attempt to control discretion through greater transparency • Concerns about costs of use of judiciary • Recognition of need for discharge • Role of counsellors? View, Master, Slide Master to change this text to the title of your presentation

21. England and Wales • Wide ranging policy strategy on overindebtedness: difficult to evaluate • Large role for private sector: “one stop shop” debt management companies quoted on stock exchange • No counselling built into the system • Modest administrative screening for entry to process

22. English options • Debt Relief Order (2009) • Bankruptcy (discharge after one year but may have to make payments for 3 if surplus income) • Individual Voluntary Arrangement (generally five years: pay proportion of debts: subject to creditor approval) • Private Debt Repayment Plan through either fee or free plan [proposal to recognise/licence these plans] • Enforcement Restriction Order (not yet in force) moratorium where social force majeure.

23. England and Wales • 2008: 67,400 bankruptcies; 39,100 Individual Voluntary Arrangements: about 320,000 Fee Paying Debt Management Plans in existence: Also non-fee paying plans through e.g. Consumer Credit Counselling Service. View, Master, Slide Master to change this text to the title of your presentation

24. Debt Relief Order • Limited to individuals with less than £15000 in liabilities: no more than £50 disposable income or £300 gross assets. • Application through approved intermediary on line [e.g. CAB]. Intermediary cannot charge fee. • Cost of DRO£90 • Expected up to about 20,000 annually. • Must be “unable to repay debts” but Official Receiver suggests limited to those who “will never pay”. • Role of bankruptcy and debt restriction order as a control on “irresponsible debtors” View, Master, Slide Master to change this text to the title of your presentation

25. IVAs • Possibility of writing down debt over time. Five years is norm. Needs to be accepted by creditors (75%) • Studies suggest used primarily by those in lower middle to low income. Perhaps one third own a home. • IVA may permit them to keep home. • Boyden et al (2006) ideal type “24 year old female graduate: a 45 year old carpenter and general builder; a couple in their mid 30s who are a foreman and part-time receptionist with two children”. • No reliable statistics on completion rates but suggest that may be higher than other countries (Green, 2009) Why? View, Master, Slide Master to change this text to the title of your presentation

26. Strengths/weaknesses • Different tracks for different levels of o/d and type of debtor • Can be relatively swift • Complexity: need for intermediaries • Need to regulate intermediaries. Problems with misleading ads and marketing • Costs borne by private parties primarily

27. Scandinavian • Initial screening: requirement to attempt renegotiation • Debt counsellors play an important role • Grounds for screening open textured: increases discretion of screening agency • Kilborn: 40% of petitions rejected in Sweden in 2002-03 • But move to streamline process e.g. Sweden 2007: cut out initial requirement of seeking consensual arrangement

28. Issues from existing empirical data • Role of amicable settlement: relation to formal system. • Significant percentage on plans have no repayment capacity. The NINAs and LILAs. • Financing the system • The role of intermediaries • Role of counselling? • Delay • Move to administrative model with judicial backdrop? [Kilborn, 2009] Who ensures validity of debts? View, Master, Slide Master to change this text to the title of your presentation

29. Financing the insolvency system • Debtors have limited funds. • Pressure on state resources (e.g. judges, debt counsellors) • Creditor funding—in England creditors effectively pay through IVA. • Belgian model View, Master, Slide Master to change this text to the title of your presentation

30. The development of the “fast track” • England: Debt Relief Order, discharged after one year • Netherlands: possibility after one year • France, one yearbut requirementto be “irredeemably compromised”. • Mann (2009) recommends discharge within one or two months with strong criminal sanctions for fraudulent bankruptcies. • Identify the NINAs and LILAs

31. Role of public/private sector • UK has large private sector • France prohibits fee paying debt management companies • Balance of public and private • If public sector dominant then will be significant queues [e.g. Germany, France]

32. Protection for home? • May be possible to keep home in some regimes in Scandinavia.Reflects origins of laws. France ---may be possible under voluntary settlement. England --may be able to retain under IVA. • Mortgage enforcement controls in response to crisis • Role of home in different economies. • Broader methods to protect home View, Master, Slide Master to change this text to the title of your presentation

33. Sources • Braucher, Mann, Niemi, Green, in Niemi, Ramsay and Whitford, Consumer Credit, Debt and Bankruptcy (Oxford, Hart, 2009) • J Niemi, I Ramsay & W Whitford, Consumer Bankruptcy in Global Perspective (Oxford:Hart, 2003) • Jason Kilborn, studies of European Bankruptcy systems seehttp://www.jmls.edu/directory/jason_kilborn.shtml#publications • EU Towards a Common Operational European Definition of Over-Indebtedness (2008). • J Niemi and A Henrikson, Report on Legal Solutions to Debt Problems in Credit Societies (Council of Europe, 2005). • U Reifner, J Niemi, N Huls& H Springeneer, Empirical Study on Regulation of Overindebtedness in the EU (Hamburg, 2003). View, Master, Slide Master to change this text to the title of your presentation

34. Sources continued • M. Gerhardt, Consumer Bankruptcy Regimes and Credit Default in the US and Europe (CEPS Working Document, 2009) • L Laeven& T Laryea, Principles of Household Debt Restructuring (IMF, 2009) • G Gloukoviezoff, ECRC Presentation London 2008. • D Korczak, Amnesty of Debts: Amicable Agreement and Statutory Solution: Synthesis Report (EU Commission: DG Employment, 2006) View, Master, Slide Master to change this text to the title of your presentation