Researching rehabilitation: evidence from Germany

Insolvency and Debt Management RoundtableFriday 26th November, Westminster Room

Michael Knoblochiff institute for financial services, Hamburg

Knobloch Researching rehabilitation: evidence from Germany

Definitions

indebtedness:„A condition of owing money or something of value to another.“

over-indebtedness:„The current or future impossibility to amortise the debts on schedule.“ (German Insolvency Code)

„A household is regarded to be over-indebted when its income, in spite of a reduction of the living standard, is insufficient to discharge all payment obligations over a longer period of time“ (German Federal Ministry for Family Affairs, Senior Citizens, Women and Youth)

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Knobloch Researching rehabilitation: evidence from Germany

Data collection and processing

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Knobloch Researching rehabilitation: evidence from Germany4

Average duration

Knobloch Researching rehabilitation: evidence from Germany

Impact of debt advice

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Knobloch Researching rehabilitation: evidence from Germany6

Approximately 100.000 persons passed legal debt-discharge in 2011

Insolvency proceedings, openings

Knobloch Researching rehabilitation: evidence from Germany7

11.8 %

1.0 %

1.3 %

2.1 %

2.9 %

3.5 %

4.5 %

5.4 %

0.2 %

0.4 %

1.8 %

2.8 %

11.4 %

0.2 %

1.2 %

7.0 %

12.9 %

29.6 %

0 % 5 % 10 % 15 % 20 % 25 % 30 % 35 %

Failed self-employmentInadaequate credit and guarantee advice

Birth of a childObligation to pay as an guarantor

Inapproppriate mortgageOther

AddictionLow income earner (poor)

Damage claims due to liabilityIgnoring social benefit entitlements

Criminal behaviourBad management of the household budget

Consumption behaviourAccident

Death of partnerSickness or illness

Divorce or separationUnemployment or forced reduced working hours

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Triggers of over-indebtedness – as seen by debt advisors

Knobloch Researching rehabilitation: evidence from Germany8

Professional qualification by age(total population and over-indebted persons)

Knobloch Researching rehabilitation: evidence from Germany9

Households affected by poverty(total population and by over indebted persons)

Knobloch Researching rehabilitation: evidence from Germany10

Methodology

Quantitative test

Former clients of debt advice agency in Wilhelmshaven

After legal discharge of debt

Identified by debt advice agency

Written questionnaire

Cash incentive (5 Euro)

400 sent out in June/July 2010 by debt advice agency

78 returned due to wrong address

59 = 18% responded to iff

No following up on non-respondants

Knobloch Researching rehabilitation: evidence from Germany

Reasons for insolvencyas seen by former bankrupts

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Number Percentage

Forced reduced working ours .............................................................................................. 1 2,0 % Earned income not suffi cient.............................................................................................. 3 5,9 % Separation from partner....................................................................................................... 4 7,8 % Unemployment....................................................................................................................... 7 13,7 % Spent too much...................................................................................................................... 7 13,7 % Sickness or i l lness ................................................................................................................ 9 17,6 % Divorce..................................................................................................................................... 11 21,6 % Problems resulting from financial services (e.g. credits) and providers.................. 13 25,5 % Other reasons ......................................................................................................................... 15 29,4 % Fa i led sel f-employment....................................................................................................... 29 56,9 %

Knobloch Researching rehabilitation: evidence from Germany

Former bankrupts´ estimation of insolvency proceedings

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Knobloch Researching rehabilitation: evidence from Germany

Help requested and received during insolvency

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Number Percentage Number Percentage Debt advice at all times......................................................................... 9 16,7 % 15 27,8 % Debt advice at times.............................................................................. 8 14,8 % 11 20,4 % Education................................................................................................. 2 3,7 % 1 1,9 % Vocational training.................................................................................. 7 13,0 % 3 5,6 % Family councelling................................................................................. 5 9,3 % 0 0,0 % Psychological support........................................................................... 7 13,0 % 3 5,6 % Other services......................................................................................... 9 16,7 % 6 11,1 %

Desired Received

Knobloch Researching rehabilitation: evidence from Germany

Debts after legal debt discharge

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Number Percentage

Clear of debt....................................................................................................................................... 32 64 % Debts incurred before insolvency proceedings........................................................................... 5 10 % Debts incurred during insolvency proceedings........................................................................... 4 8 % Costs of insolvency proceedings.................................................................................................... 13 26 %

Knobloch Researching rehabilitation: evidence from Germany

Former bankrupts´ situation after discharge of debt

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Knobloch Researching rehabilitation: evidence from Germany

Current accounts of over-indebted households

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Knobloch Researching rehabilitation: evidence from Germany

Former bankrupts´ financial situation by changes in opportunities in the job market

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Knobloch Researching rehabilitation: evidence from Germany

Former bankrupts´ financial situation by changes in labour situation

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Knobloch Researching rehabilitation: evidence from Germany

Former bankrupts´ financial situation by changes in income

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Knobloch Researching rehabilitation: evidence from Germany

Former bankrupts´ income situation by changes in educational level

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Knobloch Researching rehabilitation: evidence from Germany

Former bankrupts´ financial situation by changes in educational level

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Knobloch Researching rehabilitation: evidence from Germany

Former bankrupts´ financial situation by changes in health situation

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Knobloch Researching rehabilitation: evidence from Germany23

Conclusions Unemployment and failed self employment are key triggers for over-indebtedness

Fresh start in Germany takes too long

Long waiting period before debt advice

Out of court settlements not successful in the majority of cases

Great impact of credit bureaus

Work is key indicator for post-bankruptcy health

Majority manages to rehabilitate without extra-help

Minority needs extra-help exceeding “pure” debt advice:

Vocational training

Education

Family counseling

Psychological support

Debt advice agencies´ resources are not yet sufficient to cover the demand

More research needed!