In late April, the Ministry of Justice working group pondered legislative measures to ease debt problems. Methods of implementing the government's insolvency guidelines were also sought. The Consumer Agency raised questions of how to improve the position of debt-ridden consumers.
One of the objectives set by the government in its mid-term policy discussions was to encourage businesses and individuals to seek out assistance at an early stage. In addition, debt-ridden and bankrupt entrepreneurs should be given a second chance and their return to entrepreneurial activity should be speeded up by reassessing bad credit policy and loan adjustment processes. The broad-based discussions in April focused on finding practical ways to reach these objectives.
The Consumer Agency believes that these goals can be reached by, among other things, speeding up the commencement of loan adjustment, taking into consideration the aggressive marketing of credit as a factor promoting indebtedness, shortening the time bad credit stays on record, implementing social credit on a wider scale and making concerted efforts to develop financial and debt advisory services.
Debt adjustment must be started faster
Grounds for preventing debt adjustment may give rise to a situation where the start of debt adjustment is postponed unnecessarily. If unemployment or studying are considered to be factors that contribute to a weaker financial standing on a temporary basis only, debt adjustment can't be entered into. According to general practice, unemployment needs to have continued for about one year before debt adjustment can be started. This waiting time may lead to debtors losing their home if they are unable to make their mortgage payments. On average, a mortgage can be terminated and the collateral realised in less than a year under current provisions of the Consumer Protection Act. In addition to factors preventing debt adjustment, consideration should be given to a debtor's chances of keeping their home when e.g. unexpected unemployment causes problems in paying off debt, but the person is not excessively indebted.
A lack of resources in debt advisory services also plays a part in slowing down advisory processes and the start of debt adjustment. Consumer awareness of debt advisory services should be increased, for instance by disseminating information through the labour authorities and at workplaces when industrial co-operation proceedings lead to layoffs.
Consumer not always solely responsible for frivolous borrowing
Frivolous borrowing should only be viewed as a factor preventing debt adjustment when the debtor, aware of not being able to pay back the debts, still takes on more. We live in a credit society where financing purchases by credit is commonplace. Marketing urges people to take credit in many ways. Marketing efforts are focused on offering – and pushing – card-based credit to consumers everywhere, such as in home appliance and furniture stores.
A new phenomenon in the marketing of credit cards is the introduction of branded credit cards. In addition to banks, many retail chains offer credit cards whose use often entails supplementary benefits. The marketing of these benefits involves that they are only available to those paying on credit or taking on new credit. As a result, consumers are increasingly holding several credit cards, which in itself adds to the risk of excessive debt.
Due to the introduction of the Single Euro Payments Area, domestic bank and combination cards are changed to international SEPA cards. Consumers aren't always clearly informed of the possibility to change their domestic debit card to an international Visa Debit card, and instead they are usually offered a combination card with a credit facility as a replacement for their debit card. Quick loans are aggressively marketed on television, in magazines and on the Internet.
When the consumer has financial difficulties, the question of whether indebtedness is frivolous should be assessed with consideration of the aggressive marketing of credit. A consumer's financial difficulties can't be perceived as solely his own responsibility and the loaning deemed frivolous if he has simply acted according to what credit institutions urge him to do in their marketing. Especially where young consumers are concerned, quick loans are often not so much a case of frivolous indebtedness as a case of incomplete understanding due to a lack of experience. The responsibility for young consumers' indebtedness as a result of quick loans should also be assigned to credit institutions. In addition, legislation should include provisions calling for particular moderation in the marketing of credit and prohibiting the practice of granting discounts or other immediate benefits only to those who pay by credit.
Attention must also be paid to the duration of bad credit records and social credit
A bad credit record exacerbates the risk of exclusion. A bad credit record makes life more difficult in many ways and may prevent the person from getting, among other things, a student loan or a job. Because of this, the duration of bad credit records should be shortened for those individuals who do not have further instances of bad credit within a certain period of time. Bad credit records may be the consequence of short-term circumstances that are temporary and surprising in nature, such as unexpected unemployment. Young adults whose bad credit record is their first and who do not have further instances of bad credit, should also have their credit records cleared sooner. At present, the duration of a bad credit record may be reduced from three years to two by paying off the debt.
There is increasing demand for social credit offered by municipalities. These days social credit is primarily used for debt adjustment. Some municipalities do not use social credit at all. The use of social credit could be extended to the financing of purchases and balancing out irregular income streams. The markets don't necessarily offer reasonably priced credit to consumers with a bad credit record or irregular income. At present, consumers with irregular and low income have to resort to quick loans when they need credit.
Financial and debt advisory services must be developed
A report commissioned by the Ministry of Employment and the Economy regarding the development needs of financial and debt advisory services has been circulated for comment. The Consumer Agency places high priority on allocating more resources to advisory services, as the quick availability of such services is of crucial importance in debt problems. The time spent waiting for advisory services can often lead to a rapid exacerbation of the problem. The nationalisation of consumer advisory services has proved to be an effective way of improving service availability and consistency between regions.
Financial and debt advisory services play a key role in protecting the consumer's position. In the Consumer Agency's work, the consumer's position as a debtor has always been the focal point. In order to achieve good results going forward, the Agency must continue to be informed of problems observed in the field by the advisors despite the fact that management of advisory services is transferred to the Ministry of Justice. It would be unreasonable to expect that debtors in financial difficulties would have the energy or presence of mind to take an active role in reporting unfair practices in the markets.
The Consumer Agency also supervises the terms of voluntary debt settlement under the Act on Debt Collection. According to the preparatory work for the Act, the Agency's jurisdiction is extended to determining the opportunities for debt settlement as well as collection practices during court proceedings and payment plans.
More information:
Rapporteur: More money for financial and debt advisory services, service provision through legal aid offices (Current Issues in Consumer Law 2/2009)