Assessing responses to the treatment of over-indebtedness Professor Iain Ramsay Seminar on...

Assessing responses to the treatment of over-indebtedness

Professor Iain RamsaySeminar on Overindebtedness

Brussels November 20 2009

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.

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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.

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.

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

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


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.

The Trouble with Statistics: Consumer Insolvency 1998-2008


Per 10,000 Capita Insolvency Filings 2002,2008 [source Gerhardt, 2009: OSB Canada]

2002 2008

England and Wales 6 20

Germany 2 12

France 4 11

USA 53 35

Canada 38 44


Evaluating Debt Adjustment Plans

• Braucher (2009) outlines 3 criteria

• Creditor repayment net of administrative costs

• Rates of discharge

• Treatment

• Rational sorting

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

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

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


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.

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]

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]


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.


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)

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


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?


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

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.

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.


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”


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?


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

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

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?


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


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

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]

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


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).


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)


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