Treatment and the European Perspective: Why Don't We Ask Whether US Debtors in Bankruptcy Have Other Social Problems?

European debt adjustment systems have built in an assumption that people with debt problems also have higher incidence of other social problems—substance abuse, family dysfunction, weak impulse control, and perhaps also mental health problems such as depression and anxiety.  Social work has long been part of their systems for addressing problems of debtors, before and after European countries adopted laws beginning in the late 1980s to give debtors a discharge, generally after completion of rather long repayment plans (to show rehabilitation into more moral ways of behaving, while living at a subsistence level).  The European view has been that other problems drive overindebtedness, which in turn makes those problems worse.

In the US, we don’t seem to be giving much attention to these questions.  Is anyone aware of studies of US debtors in bankruptcy to see if they have higher incidence of other social problems such as those listed above?   And have Europeans empirically studied their theory that deviance drives debt?

The reasons for the different European perspective have to do with the social support provided by welfare systems there.  With good unemployment benefits and universal health care (and often meaningful usury limits), Europeans saw fewer reasons to get into a financial crisis involving too much debt. Furthermore, Europeans do not want social solidarity threatened by deviant behavior, making treatment the obvious solution to trouble with debt.

In the US, it seems vaguely politically incorrect to even raise the question whether the overindebted are deviant.  We haven’t gone beyond asking whether debtors’ problems are driven by a lack of “financial literacy.”  Part of the reason we don’t tend to ask whether debtors have other social problems suggesting deviancy may be that so many people carry a lot of debt and don’t save much or at all.  When a lot of people are behaving in a certain way, by definition they are not deviant. 

Europeans may be trending in our direction.  The global consumer credit market is making more and more credit available in Europe, and more and more people are getting into debt trouble there.  In this climate, European systems are focusing somewhat more on debt relief and less on treatment using social workers, a change that some decry.  We may be witnessing a gradual convergence of both experience and perspective on both sides of the Atlantic. But it still would be interesting to know if debtors in bankruptcy in the US have more social and mental health problems than other Americans.

Comments

[Steve Rhode]

As an American that is providing debt solutions in the EU I can sympathize with your comments, to a point. I hear the same point of view from many academics but trust me, come and spend some time on the front lines with me in Europe and you'll leave with a different opinion.

I fully agree that money problems are not about the money, they are about resolving the underlying issues. Our work in the U.S. at Myvesta regarding debt and depression alone showed that about 40% of problem debtors would be classified as clinically depressed. If you treat the underlying depression the debtor can recover faster.

What I find interesting is that while the EU has more social service programs their implementation of those programs on the front line is fragmented. Many programs are delivered with long delay and government red tape. Even then a combination of social service solutions is hard, if not impossible, to achieve.

In one Netherlands town the local government has moved all the social service representatives into one room so they can coordinate on the front end what needs to happen. A much better approach. Good, but unusual.

But the overlying issue here is not what must be done for the debtor but what governments allow creditors to do to their citizens. Just like in the U.S. the creditors in the EU are very focused with recovery and not so much with understanding. Consumers in the UK for example have been watching their reasonable debt solutions stripped as creditors have set artificial hurdle rates for consumers to meet to be able to repay. (I know, sounds crazy, but that's the way it is.) Creditors in the UK encourage bankruptcy because they know people don't want to go bankrupt so they just sit on the treadmill of never resolving their debt.

In the Netherlands a fair amount of creditors only agree to "sensitive" programs if you promise to pay them a little something on the side. In Ireland creditors are more understanding but then again as I write this people are sitting in and going to jail for unpaid debts. Only 9 people went bankrupt in Ireland last year because debt there is for life.

Even the Czech Republic just changed their bankruptcy rules to make it much tougher on consumers and gave significantly more power to creditors.

I could go on an on but I'd have to say that in comparison the EU isn't better than the US, just different. In both places, consumers still come second.

[Jason Kilborn]

This notion of bankruptcy being a last-chance haven for miscreants and social outcasts (that is, folks with substance abuse problems, mental illness, etc.), seems to be part of the same sort of smear campaign that Sullivan, Warren & Westbrok have so soundly debunked in the U.S. over the past two decades. The Europeans are getting more serious about empirical evaluation of these sorts of claims, and the existing empirical data suggest that SW&W's conclusions about bankruptcy in the U.S. are true in Europe, as well.

Debt counselors and other empirical researchers in Europe consistently report that financial distress is caused primarily by unemployment, divorce/separation, other income interruption, and sometimes by lack of financial sophistication or some other "subjective" problem with debtor judgment or behavior. Instances of substance abuse and mental illness as contributors to financial distress are very rare (though such widespread problems as depression must exacerbate the problem, as Steve notes in his great comment). Nonetheless, the smear campaign has become fairly aggressive in some places. The most recent reform of the Dutch personal insolvency law originally included a provision designed to prevent such "deviant" people from using the insolvency system, but level-headed legislators modified the provision to prevent entry only to debtors whose substance abuse and similar problems were "not under control."

As far as we can tell from existing empirical data, European debtors come from the same slice(s) of society as their U.S. counterparts: the fragile middle class. Yes, their incomes on filing day are quite small (generally at or below the "poverty line," though the Europeans measure this in a very different way than we do), but that's true in the U.S., too. The only thing that clearly separates debtors from the general population in both Europe and the U.S. is a huge debt to income ratio, generally due to an income interruption (usually long-term unemployment).

Social welfare benefits in Europe are not and never were designed to treat the ills resulting from a combination of income interruptions and widely available consumer debt (a topic which I have examined more carefully recently, see http://ssrn.com/abstract=926203). Recent cutbacks in unemployment coverage as a result of changing labor market conditions, in particular, have subjected many Europeans to the same risks that their U.S. counterparts have faced for decades--it's no surprise that more tailored responses to their debt problems have been needed in the form of targeted insolvency relief.

More and more, we're seeing European legislators abandoning the moralistic "individual solutions" model and moving toward a more one-size-fits-all "do what you can with available income" model (as in the most recent Dutch reforms, effective Jan. 1, 2008). Most payment plans in Europe are zero plans, and no treatment of mental health or other probelms is mandated in any system but France (and the social workers on most overindebtedness commissions there have reportedly not been able to implement effective solutions even where they've tried).

Looking for explanations in mental health, substance abuse, etc., offers a false sense of security. These debtors have simply fallen over the precipice on which many of us in middle class society stand. It's comforting to chalk up these folks' problems to isolated instances of substance abuse, etc., rather than admitting that "there but for the grace of God" . . . .

[Adam Levitin]

I would have thought that to the extent there is a causative, rather than a correlative relationship, it would run both ways--some social problems (like substance abuse) drive debt, but the stress of debt also drives social problems (like substance abuse or domestic violence).

[Jean Braucher]

I should probably have given my sources for my original post. My description in that post is not of my personal views but of views expressed in European reports. My first source is Nick Huls et al., Overindebtedness of consumers in the EC member states: facts and the search for solutions (1994 report commissioned by the Consumer Policy Service of the Commission of the European Communities), which states at p. 12, "Drawing on the experience of years of debt counselling for hundreds of thousands of debtors, the German welfare and consumer organisations start from the assumption that overindebtedness is, in most cases, not the cause of a problematic personal situation. It is both a symptom and aggravating factor in that situation."

More recently, we find the respected European researchers Johanna Niemi-Kiesilainen and Ann-Sofie Henrikson, in their 2006 report to the Council of Europe, "Legal Solutions to Debt Problems in Credit Societies," at pp. 30-32, discussing the history of individual debt counselling in Europe (long before debt adjustment systems were heard of) and the use of social work in that process. They note: "The traditional debt counselling paid much attention to the ability of the debtor household to follow a budget. The counsellor was expected to give psychological support, to direct the debtor to appropriate services, to give advice on available social security benefits and to monitor the payment plan. As the European Study on Legislation notes this social work aspect of debt counselling has diminished as the preparation for a filing has become more central."

I do not know whether the longstanding European view that debtors need treatment is correct or misguided. But I do not think it is a smear on debtors to ask the question whether treatment and social support might be what some of them need. I do not mean to judge but to evaluate what responses to debt problems might be helpful. If in fact debtors in bankruptcy have more social problems (or psychological problems) than other people, this might suggest an entirely different approach to dealing with those problems than is currently even contemplated in the US. For just one example of a question this line of inquiry raises: Are lawyers the best professionals to help the overindebted? Even if lawyers should be part of the team, should they be the whole team?