Tens of thousands still burdened by recession-era debt

Debt adjustment processes are avoided in order to shield guarantors

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By Eeva Eronen
     
      According to various estimates, between 20,000 and 40,000 Finns are still repaying debt accumulated before or during the recession years of the early 1990s. One of them is Nina Honkanen, who related her story in last Sunday’s Helsingin Sanomat. Honkanen, who became burdened by debt in her twenties due to a loan she had guaranteed, should be rid of her debt load in 2008, just in time for her 40th birthday.
      Not everyone is as "lucky". The remaining group of debtors includes people who have fallen through the cracks of society or have otherwise become embittered, as well as plenty of those who avoid the debt adjustment process because they do not want to burden their guarantors, estimates Leena Veikkola, the head of the Guarantee Foundation, which provides support to debtors.
      "It has also happened that guarantors have threatened that a certain debt must be repaid, or the person will be killed", she reports.
     
Those who struggle under the pressures of honour issues or fear pay off their bank loans little by little. What is problematic for them is the fact that the money for everyday expenses needs to come from other sources of credit, such as credit cards, which drag the debtor even deeper into a vicious circle.
      According to the estimates of the Finnish Bankers’ Association, the voluntary debt settlement programme, which was initiated a couple of years ago, helped the plight of around ten thousand Finns. The alternatives for those that remain are seeking debt adjustment, negotiating a voluntary solution with the creditor, or waiting for the possible changes to debt recovery legislation.
      Veikkola points out that in addition to legal avenues, Finnish debtors are in need of psychological aid. Psychological support would be welcome for those who have lost hope as well as for those who need to find the strength to face their guarantors.
     
The majority of the remaining debt stems from small enterprises. Veikkola estimates that the largest group of debtors is formed by those who have been marginalised and do not have the energy left to try anything.
      According to various studies, the median sum paid by the debtors who participated in debt adjustment has been 70,000–80,000 euro. Due to large differences in the amounts, the average sum totals nearly 200,000 euro. The value of the debts of those who sought voluntary debt settlement amounted to around half of the value of the debts of those who were in debt adjustment.
     
The possible alterations to debt recovery legislation may bring some light to the end of the tunnel for those living with large debts. At present, debt recovery procedures are carried out for fifteen years, which means that the first debtors who wound up in trouble during the 1990s recession will be freed from debt recovery in 2008.
      However, the debt is not erased even if the recovery ends. Tuula Linna from the Law Drafting Department of the Ministry of Justice believes that the situation will lead to a conflicting status for many debtors.
      Due to the possibility for misunderstandings, the Ministry of Justice plans to propose a change to debt recovery laws that would allow for debt to be annulled in normal situations two years after debt recovery has ended.
     
According to Linna, the change in legislation would be highly significant for those who accumulated debt during the recession years.
      "The proposal aims to turn passive people undergoing debt recovery back into active members of society", she explains.
      The government can present the necessary bill to Parliament next year, and the law could take effect in the beginning of 2008. In this case, the first debtors would be permanently free of their burdens in 2010.
     
Debtors have been able to seek regular debt adjustment even while the voluntary debt settlement programme has been in effect. The difference is that in debt settlement, the creditor approached the debtor. In addition, debt settlement included the possibility for a so-called lighter process where a debtor who has been insolvent for an extended period of time could have their entire debt cancelled.
      There is no consistent data available on those who have sought debt adjustment after the end of the debt settlement programme, or from the last quarter of 2004. Over one thousand debt adjustment applications were lodged during the first quarter of 2005. The number of applications has been on the rise for the past couple of years, which is primarily due to the fact that the criteria for acceptance are now easier to fulfil. For example, the old obstacle of "imprudence when taking out a loan" has been overlooked if the debtor’s financial distress has lasted for a long time.
      According to the estimate of the Ministry of Justice, around half of those who currently seek debt adjustment have debt dating back to the 1990s recession.
     
Helsingin Sanomat / First published in print 10.8.2005

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