iff- Over-indebtedness Report 2017 - Over-indebtedness in Germany

Consultancy data show that hardly anyone can make use of the reduction of residual debt relief. Starting July 2017 it is now at least on principle possible to get rid of one’s debt after five or even three years instead of previously applying six years since July 2017. So far, however, this new opportunity has been seized only rarely. Indeed, in order to benefit from the shortened probation term, the applicant has to cover the total of legal expenses. Moreover, a probation period of three years requires the applicant of residual debt relief to pay off an additional of 35 percent of his debt. Already now and prior to the first publication of official figures, it seems to be clear that the insolvency law reform has come to nothing. The iff advisory software provides the tool for over-indebted households to make the necessary calculations. However, we found that this was used by not more than 2.5 percent of the participating over-indebted households. The calculations required for this purpose in the iff debtor advisory software CAWIN, which provide the basis for this report, were used for a maximum of 2.5 percent of over-indebted households.

Over-indebted people are left behind in spite of the minimum wage - it depends on household incomes. The positive trend in the labour market continues, unemployment is falling, employment is rising and incomes are rising. Nevertheless, the number of people with so-called "negative characteristics" rose again from 2015 to 2016 by 130,000 to 6.85 million. Up to 622,000 people are waiting for discharge of residual debt and 617,000 people consulted 2016 debt counselling offices. The introduction of the minimum wage still does not yet confirm a distinct reduction in the number of ”augmenters”, i.e., those recipients of unemployment benefit II who are employed but are still dependent on supplementary benefit. This was the declared goal of the launch, but the number of these products has only decreased from 1.24 to 1.19 million last year - only six percent. This shows once again that household incomes are too low, and the minimum wage did not bring about the envisaged effect.

Despite declining unemployment rates, unemployment remains the most important reason for over-indebtedness with light improvement in sight Unemployment and reduced employment together account for 24.3 percent of the stated causes and, although they have lost some of their significance, this by far most important trigger of over-indebtedness is still at a high which also implies that declining unemployment figures reveal themselves in the statistics only gradually. Differently put, the over-indebted seem to find it more difficult to find a job in comparison with the rest of the population. As in the previous year, with 11.1 per cent income poverty ranks second as a trigger of over-indebtedness. After a short stabilization in 2015, income poverty has again taken up its continuing growing trend in 2016. In the same period, income poverty in Germany has risen significantly less sharply and has recently stagnated. Illness (9.9 percent) has been gaining in importance for years and now holds a middle position, which also applies to divorce and separation. Failed self-employment (8.6 percent) and consumer behaviour (9.6 percent) continued to decline in importance. Together, these “Big Six” account for more than 70 percent of overindebtedness triggers.

The gap to the poverty line is widening Price-adjusted the poverty line rises by five per cent to 1,033 euros – on the other hand, the incomes of over-indebted people have remained almost 15 per cent below the level of over-indebted people in 2008 at around 870 euros for the past four years.

In addition to interest, insurers, debt collectors and lawyers are charging significant costs of collection. Insurers, debt collectors and lawyers charge an average of 10 per cent of the principal claim in addition to interest. In the case of mail order companies, interest and costs add up to an additional one quarter of the principal claim. More than half of over-indebted people have debts of less than 20,000 euros. The typical debtor as represented by the median owes 14,690 euros. Almost one third of the debtors have less than 5 outstanding receipts. After all, 17 percent have more than 20 receivables. With the number of receipts, the complexity of debt counselling is increasing significantly.

Public-sector debts increasingly significant Though declining for years now, bank debt continues to account for the major share of household debt and has reached just over 20 per cent. By contrast, the proportion of debts owed to public-sector creditors has been growing steadily since 2004 and has reached 15.2 percent. Telecommunication debts follow a similar pattern, though by counting about 10 per cent, they are markedly less significant.

Typical over-indebtedness: between 25 and 45 years old, without a partner and often with children. At the beginning of the counselling period, slightly less than half of the over-indebted are between 25 and 45 years old. This means that people of this age are represented twice as much in the group of over-indebted persons than in the total population. Although young people up to the age of 25 are slightly more strongly represented in the group of over-indebted persons than in the population as a whole, their share of debtors has declined recently. The typical overindebted person aged 25 and 45 years is single (60.2 per cent) or single parent (15.2 per cent.

Aim of the study

The iff overindebtedness report is an annual nation-wide study on the situation of over-indebted households in Germany who call on the help of debt counselling offices. The aim of the study is to provide involved social groups like politics, administration and debt counselling affected households and suppliers of financial services with reliable data in order to find common solutions for combating the problem of over-indebtedness and to reduce the negative consequences of over-indebtedness.

Design of the study

The iff overindebtedness report has been published since 2006 and is produced by a team of sociologists, lawyers and economists. 104,000 households were investigated for the iff overindebtedness report 2017, who  have taken part in debt counselling between 2006 and the first quarter of 2017. The anonymous data from 39 counselling centres located in  the 16 federal states of Germany (“Bundesländer”) were evaluated. The data are process generated, i.e. documented, summarized and prepared for statistical analysis during the advisory process in the debtor advisory office by help of iff's debtor advisory software CAWIN. Households analyzed were mainly not self-employed and over-indebted; just in less than one out of ten cases over-indebtedness coincided with former failed self-employment.

What is debt, how is over-indebtedness defined?

In the over-indebtedness report debt and payment obligation refer to the same thing. Payment obligations are normal and even desirable in the modern society with a high division of labour because otherwise investment into the future would not be possible. Payment obligations not only arise in the case of monetary loans but also in the case of other long-term obligations such as rental agreements or telecommunication contracts. The problem is that debt can grow into over-indebtedness provoking a crisis. Relatively over-indebted are persons who are not in a position to pay off  their debts within a manageable period of time using existing assets and free income without putting the acquirement of basic services at risk. Absolute over-indebtedness (or revealed over-indebtedness) occurs when so-called hard signs of over-indebtedness are added such as late payment, premature termination of the loan by the creditor, account termination and compulsory measures such as the arrest warrant for the enforcement of asset disclosure.

In most cases over-indebted people are not "to blame" for their situation - the most important triggers are life crises

Figure 1 shows, how often in 2016 debt counselling agencies noted down certain factors as the main trigger for over-indebtedness. These factors can be divided into specific events, avoidable behaviour and other triggers. Events are factors lying outside the influence of consumers. These include unemployment, divorce or illness. With a total of 45.3 per cent of cases, they represent the largest group of over-indebtedness triggers. Triggers, which are summarized under "avoidable behaviour" and which include irrational consumer behavior as well as a lack of financial literacy (3.2 per cent), noneconomical budget management (2.8 per cent) and delinquency (2.1 per cent), are of secondary importance, like in the previous year amounting to 18.1 per cent of cases.