Saving the debtors
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Kjeld Möller
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Viljo Savolainen
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Oskar Salakari
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By Minna Lindgren
Espoo resident Kjeld Möller fell deep into debt in the 1990s, much like many others. Under the leadership of the President, the government, and the Bank of Finland, the state rescued the country’s banks, knowing full well that the operation would force many small businesses into bankruptcy.
It is estimated that 40,000 companies experienced this fate by the end of 1994. About 100,000 people became overextended through no fault of their own, simply because they had trusted the banks and the politicians.
It is estimated that thousands of former entrepreneurs committed suicide.
Therefore, Möller is a winner, in that he is alive, and out of debt. After ten years of struggle, his bank forced him into an agreement over the debts. At the same time he fell ill with Parkinson’s disease.
Now Möller lives in a two-room flat in an assisted living home in Espoo.
In his former life Möller was a rally driver and ran a communications and advertising agency. In the late 1980s he invested in a residential property, which was to become the new office of his company. Möller paid half of the price up front. The rest was to be paid when the seller would manage to change the status of the property from a residential premises to an office.
As the applications were being processed by zoning officials, property prices rose. The zoning application was rejected, and the seller wanted to cancel the deal.
“We fought about it for four years”, Möller says. The Court of Appeals decided that the sale was still valid, but the bank was not able to finance the rest of the purchase price. It had run out of money. The property reverted to the seller, who got to keep Möller’s down payment.
Möller’s company went bankrupt and he moved to Spain with his family.
“I did undocumented work. There was no other option”, he says.
Then the bank sent both of Möller’s daughters a distraint notice for a million markka. The loan had been secured through a one-room flat that was in the name of the daughters. However, the value of the property was not enough for the bank, which wanted interest from the two daughters.
“When the revolver was being held against my children’s heads, I had enough”, Möller said.
He paid the bank bank a sum that had been agreed through arbitration, and the dispute over a debt of more than a million markka was over. Möller notes that mandatory arbitration is known best in Southern Italy, but there they do not call it banking.
Möller survived, but he had to pay a heavy price. Living in the assisted living facility is a divorced man, for whom his adult daughters are the most important things in his life. Both of them have sworn never to start a business.
In the spring of 2001 Möller was asked to join the men’s mutual aid association Miessakit. A pilot group had been set up there to help the over-indebted. Participating were many organisations, from the Espoo debt counselling office, to a social work organisation of the Lutheran Church, to private companies.
Möller would not have joined the effort without being asked. “I am not good at asking for help. I did not know about peer assistance or its importance.
The group allowed failed entrepreneurs to speak about issues using the right terminology: “bankruptcy, depression, divorce, marginalisation, shame, powerlessness, guilt, alcohol...”, Möller says. “There was the whole array of misery.”
The most bitter were those whose debt was not self-inflicted. Some managed to wipe out their debt in a year. Some no longer had the strength to make the effort.
After the work of the pilot group came to an end in 2002, those who made it through their problems set up a separate “Kaski group” to help others in the same predicament. The model for action was ready. The group works to put the financial matters of the indebted back into shape, organises peer support, and encourages those affected to exercise.
Now Möller is the executive director of the Kaski group. From 2002 the organisation has helped citizens who have lost their credit status get their heads above waters.
There are roughly two kinds of debtors. Municipal debt advisors are kept busy by people with multiple problems, whose lifestyles leads them to become indebted: alcoholism, gambling debts, instant loans via SMS message, and unemployment. Then there are private entrepreneurs who have fallen into bankruptcy. The Kaski group mainly involves these innovative workaholics.
There are no official statistics on the number of people who are over their heads in debt. Suomen Asiakastieto has a registry of 301,000 Finns with payment arrears and credit problems, but not all of them are overly indebted. The data also includes those who are unwilling to pay a debt, or whose debts are relatively small.
Last year 57,255 Finns had been under threat of debt recovery procedings for two years or longer, and 1,922 private individuals had submitted debt rescheduling applications to Finnish district courts. According to follow-up information of the Finnish Consumer Agency, about 30,000 people avail themselves of debt advice services each year. Only half of advice units are able to adhere to the maximum 60-day waiting period that was set by Parliament.
A typical person helped by the Kaski group is a middle-aged entrepreneur, who has had cash flow problems for several years. Also seeking help are people who have guaranteed the loans of a friend or relative, people who have bought too much on credit, and compulsive gamblers.
The current trend of Finnish indebtedness - SMS instant loans and large housing loans taken out by young people - frighten the men of the Kaski group. There are more people needing help than ever before during the group’s existence.
Over the years the Kaski group has helped up to 1,000 people with their debts. The help from the organisation often comes more quickly, and is more efficient than what is available from municipal debt advisors. The municipal services have been seriously backlogged, and the Kaski group helpers do the heaviest work on behalf fo the debtor: finding out how much the person owes and to whom.
One of those receiving help is Viljo Savolainen, whose small companies in the graphics field, which employed six people, produced a turnover of up to five million markka. “And we didn’t sell anything. We just worked, evenings and even the weekends. It wasn’t profitable.
In the early 1990s there were changes in the printing business. It was important to be among the first to get computers. The most expensive computer bought by Savolainen cost 125,000 markka and a printer cost 75,000. “With the software on top of that, the whole package cost 300,000 markka”, Savolainen recalls.
The bank offered him a currency loan, and Minister of Finance Iiro Viinanen made a bet during a television broadcast that the markka would not be devalued. It was devalued. Savolainen’s debt rose to a million markka and interest rates shot up to 18 per cent.
If a debt is not paid off on schedule, the debt grows rapidly. Interest is compounded, and payments do not reduce the principal. Limited partnership companies like the one that Savolainen’s had, do not go into bankruptcy. Instead, their debts become the personal responsibility of the owner.
In 1997, when Savolainen was three million markka in debt, he became marginalised. A person whose credit rating collapses cannot work as an entrepreneur, cannot get work, an apartment, a telephone, an internet connection, and cannot even buy a new washing machine on credit to replace the old one that has broken down.
Savolainen reacted in a manner that is typical of those who find themselves over their heads in debt. He stopped opening envelopes that came in the mail. “One loses one’s sense of proportion”, he says. “It makes no difference how much you owe, if you can’t pay anyway. You can’t even pay taxes.”
Savolainen lived what his wife earned as a home day care provider, and worked via a company that was kept in his wife’s name, taking as his own pay only the minimum that officials have decreed an indebted person must be able to keep to live on. For someone living alone, it is about EUR 450; for Savolainen it was EUR 500 a month.
“If my wife would have left me, I would have shot myself”, Savolainen says.
At first he did not even tell his wife about his debts for fear that she would leave him. This is also typical behaviour for the deeply indebted. Failure is seen as a disgrace. The mind is burdened by guilt, and by fear that someone might learn the truth.
After hanging on the fringes of society for years, Savolainen managed to get the nerve to tell his friend Oskar Salakari, a member of the Kaski group, about his predicament. In April 2008 Savolainen gave the association the authority to rearrange his debts. On the same day Salakari sent an enquiry to the collection agency and the tax authorities about Savolainen’s debts.
“Typically, an indebted person has a pile of bills in a plastic bag”, Salakari says.
Salakari quickly learned about Savolainen’s debts from the Lindorff collection agency. There was just EUR 33,000 left of the debt, because most of it had expired.
Negotiations were launched with the collection agency on how much money it wanted to forget the debt. Unpaid debt is a commercial asset: banks would sell debt capital that the state had already compensated to debt collection agencies.
“The amount which the banks sell debt is a secret”, Salakari says. “A strong rumour is that the price is five per cent of principal, and it certainly is no more than ten per cent. That is the range in which we bargain.”
These negotiations with debt collection firms are the trump cards of the Kaski group.
“We certainly know how to buy and sell” Kjeld Möller laughs.
The collection agency had paid the bank EUR 3,300 at the most for Savolainen’s debts. Savolainen was ready to pay a four-digit figure beginning with the number 2. Salakari, representing the Kaski group, presided over talks with the agency, and agreed on EUR 2,990 as the sum to be paid off.
Apparently, the writeoff was in the interest of the collection agency as well. The alternative is often getting nothing at all.
A contract was signed in June 2008 - less than two months from the time that Savolainen had contacted the Kaski group. He paid the money immediately with a loan that was taken out in his wife’s name.
Creditworthiness is restored two years after debts are paid off. In January 2010 Savolainen checked his information with Suomen Asiakastieto. “I was worthy of society again, after 12 years”, he says.
After being unburdened of his debt, Savoilainen has been active in municipal politics, as a lay member of his local district court, and as chairman of the board of a rental apartment company in Kirkkonummi.
On the other hand, he does not believe in politics very much. His troubles started when he trusted Iiro Viinanen.
Nowadays, debts no longer follow a person interminably. Instead, they expire 15 years after a distraint order has been issued. Möller feels that the decision on the matter, which came about two years ago, is a step in the right direction.
Another step is the law on social credit dating back to 2003, which allows municipalities to guarantee loans of up to EUR 10,000 to the indebted.
Such guarantees can also be given by the Guarantee Foundation, which is administered by the Lutheran Church and various other organisations. However, more than half of all applications that it receives are rejected. Reasons usually include an inability to pay, or an excessively big loan. Both the sums that are guaranteed and the number of applications have increased in recent years.
“People seek help too late”, says Minna Mattila, communications chief of the Guarantee Fund.
If negotiation is not an option the debtor can seek a court decision for rearrangement of the debt. This involves a five-year payment scheme that the creditors can extend by another two years.
The preconditions for this are that the falling into debt was caused by a change in prevailing conditions, and that the debtor is capable of repayment. The process is long and complicated. If the debtor successfully completes the requirements, it is often at the expense of his or her health and domestic happiness.
“Broken glasses and a washing machine out of repair”, is how one online commentator describes it.
The Kaski group has made a number of initiatives to ease the plight of the seriously indebted, and has issued statements to government ministries. The most important legislative initiative is being handled in Parliament. It would set a limit on the amount and time for overdue interest. Today, an unpaid debt carries an interest rate of up to 16 per cent. This means that a pair of socks costing ten euros can end up costing EUR 500.
“Indebtedness should incur reasonable consequences, not a life sentence”, says Möller.
He does not mean that debts should be forgiven outright, but that the original principal should not more than double. Repayment should involve reduction of principal, and not just payment of interest, from the very beginning.
“A young person who fails to meet a single payment is pushed out of the housing market. This is not in anyone’s interest - not even that of the financier.”
Excessive indebtedness ends up costing society much more than settling a debt. Entrepreneurs are often active, inventive, and diligent citizens who should not be kept marginalised and dependent on social services.
“Finland has a shortage of entrepreneurs”, Möller exclaims.
He compares the banking crisis of the 1990s with the sinking of the Estonia. “From the point of view of someone who is overly indebted, the situation is as absurd as if shipping companies and the Maritime Agency had agreed that the sinking of the Estonia was the passengers’ fault.”
From the point of view of bankrupt entrepreneurs, nothing was done to prevent the bank crisis. As Möller sees it, economic failure is a crime in Finland, which is why entrepreneurship is not worthwhile. Not even helping the indebted is seen as an activity worthy of support.
Möller has now had to put the Kaski group on a “summer break”, because the Finnish Slot Machine Association (RAY) no longer supports its activities. So far the group has received an annual grant of EUR 60,000 from RAY.
Möller has heard a number of explanations for why the subsidy was cancelled. One was that the support was meant only for helping launch the organisation. The activity was also seen as too small, or it duplicated the work of municipal debt counselling.
Auli Pentikäinen of the Espoo debt advice office sees no danger of duplication. “The Kaski group is an important provider of peer support. It is doing magnificent work”, Pentikäinen says. She concedes that there are serious backlogs in municipal debt counselling.
Möller wonders why work in the third sector is not acceptable for society. He suspects that an attitude problem is involved. “Those who are excessively indebted are the lepers of our society. Solving their problems is not in anyone’s interest.”
After the summer, the key figures in the Kaski group will weigh their options. “We’ll see if any coperative bodies, good will, or understanding can be found.”
The group may have to close up shop. Möller is nevertheless optimistic. “We have solved even greater problems than the present ones of this association.”
Helsingin Sanomat / First published in print 1.8.2010
Helsingin Sanomat
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| 3.8.2010 - THIS WEEK |
 Saving the debtors |
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