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Personal insolvency: Europe needs harmonised procedures

Without fair and efficient debt relief mechanisms, the prison of over-indebtedness leads to mental and physical health issues. Faced with this rising issue, Europe has a moral obligation to create a new harmonised framework for personal insolvency

A recent Finance Watch blogpost began to explore the issue of over-indebtedness and illuminated a pathway forward to help European households. This pathway has two components: prevention and relief.

Finance Watch’s fresh report on personal insolvency, From debtor prisons to being prisoners of debt, examines the second piece of the puzzle.

The history of personal insolvency: a relief mechanism

Personal or consumer insolvency are umbrella terms for debt relief mechanisms that can be activated when an individual is unable to repay their debts. The idea of debt predates the invention of money itself. Anthropology finds that recorded debts date back to 3,500 B.C. in the Sumer civilisation of Mesopotamia. At that time, when poor Sumarian farmers were unable to pay, their children were enslaved and forced to work until the debt was deemed repaid. Social tensions quickly arose as a large part of the population found themselves and their family members in slavery. So, not too long after the invention of debt, debt relief was born. To keep the peace and ensure prosperity, the kings of that age would periodically cancel all debt and restore freedom to the enslaved.[1]

Societies worldwide have carried this legacy of debt and relief into the modern world. While we may have gained a greater appreciation for human rights and learned many lessons along the way, personal insolvency practices still tend to be punitive. That is, despite a culture that encourages citizens to consume credit ever more, when met with  financial hardship, they are punished as if they have committed a crime.

Why should EU insolvency procedures be harmonised?

Today in the EU, personal/consumer insolvency frameworks are different in each Member State and can be classified into three types:

BankruptcyDebt settlementInformal arrangements
Debtor assets are liquidated and divided between a set ordered list of creditors.Debtors commit to payment plans and do not necessarily have assets liquidated.An agreement is made between the creditor(s) and debtor to resolve outstanding debt.
Unlike the other two options, this does not necessarily involve court proceedings or a procedure by a government authority.

While not all EU Member States go so far as to imprison, some do incarcerate debtors unable to keep up with repayment schedules under debt discharge agreements. Imprisonment can occur regardless of the reason – whether a debtor has refused to pay or simply cannot.

In any case, Finance Watch’s analysis of personal insolvency schemes across the EU found some common barriers to access and issues in terms of providing debtors with a true fresh start that could be addressed by developing standards for best practice at EU level.

On top of debt: proceedings costs, proof, and a big pile of debt

Common barriers to access personal insolvency procedures include the debtor-paid insolvency proceedings costs, accumulation of a certain amount of debt to be eligible, and provision of proof that the financial difficulty was reached in good faith and that they have attempted to resolve the debt out of court.

A false fresh start

If accessed, debtors spend an average of 5 years discharging their debts, living on subsistence wages while the remainder of their income is divided between their creditors. While evidence shows that a discharge period of 3 years or more is not socially sustainable, a discharge period of this length is only possible in eight Member States.[2] It is only guaranteed in two.

The burden of living in high debt

It is important to keep in mind the impact that over-indebtedness can have. A 2019 study from the University of Singapore found that debt impairs an individual’s [3] decision making and psychological functioning. It is also known that the over-indebted are much more likely to suffer from mental and physical health issues like clinical depression, diabetes and heart conditions.[4] The common types of crises to trigger over-indebtedness – a job loss, divorce, illness, death in the family, failure in business – may also continue to plague the individual.

These issues and the barriers to access insolvency proceedings keep households in a debt trap. A 2014 study by the Swedish Consumer Agency (Konsumentverket) found that 55% of the individuals seeking debt restructuring had been over-indebted for ten years or more before applying to or being granted restructuring procedures.[5]

Living in over-indebtedness also negatively impacts work productivity, increases the demand on healthcare systems and results in reduced personal and professional development opportunities for children of the over-indebted.

Time to act – need for a standalone consumer insolvency directive

Before the pandemic, nearly one out of three Europeans said they would be unable to bear unforeseen expenses…[6]

While data from 2021 is not yet available, data from 2020 shows that this inability to cope financially has grown and is much more severe for subsegments of the population. Between 2019 and 2020 the percentage of the population unable to cope in Germany grew from 26% to 38%. In Greece, it has grown to 50%. Nearly 57% of single parent families across the EU, the majority of whom are led by women, report they would be unable to cope with unforeseen expenses.

The need to improve consumer insolvency rules has long been known – with the Council of Europe creating a comprehensive list of recommendations that were broadly supported by Member States in 2007 –  but there was a lack of political will to move forward. To date the patchwork of insolvency frameworks across the EU have fallen short of providing fair access and a true fresh start for the over-indebted.

Finance Watch finds that the creation of a standalone consumer insolvency directive will provide the pathway to relief for EU households .

What can I do to help? How can I get involved?

Read the report on personal insolvency, From debtor prisons to being prisoners of debt  to learn about the several options that EU policymakers could take.

Contact the author or visit our website to learn more about Finance Watch’s work on contributors to personal debt, harmful debt collection practices, and other financial inclusion issues.

Get involved! Finance Watch needs your help to boost policymaker’s political will to act!

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Emily Glantz

[1] Graeber, David. Debt: The First 5,000 Years. Brooklyn, N.Y: Melville House, 2011. Print.

[2] Jerusalmy, Olivier,  2020, Is the human dignity of individual debtors at risk?: https://www.finance-watch.org/wp-content/uploads/2020/01/Report_Human-dignity_final_with-annex.pdf

[3] Qiyan Ong, Walter Theseira, Irene Y. H. Ng. Reducing debt improves psychological functioning and changes decision-making in the poor. Proceedings of the National Academy of Sciences, 2019; 201810901 DOI: 10.1073/pnas.1810901116

[4] Ahlström, R., & Edström, S., Savemark M., The Swedish Consumer Agency, Report 2014: Is debt relief rehabilitative? 15 Finance Watch, Response to the Consultation on the Evaluation of the Consumer Credit Directive,

[5] IBID

[6] EU SILC https://ec.europa.eu/eurostat/en/web/products-datasets/-/ILC_MDES04

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