Coping with severe debt problems

Christian Poppe SIFO Copingwithseveredebt problems

The Problem Market: But: • Debt problems originate in the market context • The moral imperative: Bills must be paidon time • The debtorfacescertaindemands: • Notifythecreditorsaboutthe problems • Be accessible • Give all necessaryinformation • Be ready to negotiate • Changethelifestyle • Keeprenegotiatedobligations • Defaulters do not always do as expected • Make stupid decisions • Do not changelifestyles • Do not make extraefforts to pay • Make themselvesinaccesible • Keepthemoneythemselves • Are unreliable: do not keepdeals • Expanation: immoralattitudes • Theytry to getmoneytheyare not entitled to • Theytry to hideawaymoney • They spend otherpeoples’ money • They do not want to pay

InstitutionalConditions • Civicsociety: • Family • Friends/ network • Non-profitorganisations • Social orientation: • Closeness & solidarity • Integration: in- and out-gruups • Protecttheprimarygroup from outsidethreats • Everydaydialogues • The life world • Can e jeopardised by the market • System World: • Market + state • .. shallehance te life world • .. Butparticularlythe market has a bad reputation • The system world be besubordinated to thelife world • The stateshallprotectthelifeworld b regulatingthe market

Financial Skills as socialknowledge Welearnfinancial skills Standard packages • Born into a family • Learn fin. norms and values • Learn acceptable fin. careers • Learn that conform actions yield social belonging • Lern the difference between oneself and others • This knowledge provides the basis for routines • .. And creativity • Lists of goods, service and necessary investments • Standard budget: a national package , common multiple • Variation: sub-cultural packages varying by • .. resources (social class, status) • .. age • .. era • Group level

Standard PackageOrientation Store of knowledge Everday finance • How to transform financial resources into social prestige • Whole packages • Legitimate means • Normative constraints • Actual market knowledge • Symbolic skills: demonstration of social belonging • Justifying everyday routines • Consumption is institutinalised • Mdemonstrate similarities and dissimilarities • Dougnut focus • Identity through consumption • Packages with different price tags • Packages that stress different social arenas • Packages with differnt needs for credit

Packages as socialconstraints The normal situation The problem situation • A conservative social constraint: • Normatively: belonging is something that is achieved • Life styles must be maintained (the home) • Life styles must be adjusted (age, technology) • Packages channel resources in certain directions • Packages tie up resources • Gdebt problems imply that one can no longer afford the package • To leave the package means: • .. to take on a different, cheaper and unwanted package • .. to give up habits and routines • .. to give up coveted actvities • .. to lose achived scial belonging • .. being unsafe: we all fear the unknown

Copingwithdebt Problems • We live in the Life World: • Demands and constraints not only from the system world, but also from the life world • Protect the living conditions of the primary group • Aversion against de-classation: • Mone does not give up one’s investments or consumption habits • Implication: • The socially sensible is often irrational from a financial point of view

Informant Characteristics • 20 defaulters • 25 – 65 yrs • More than 5 years in financial trouble • Have alreadyapplied for, or shouldapply for, a debt settlement • Half ofthemare from themiddleclass • Half ofthemare from thelabourclass • Between NOK 500.000 and15 mill ofdebts

Stages • Stage 1: • Retrospectively: oneshould have acteddifferently • Tsunamieffect stage 2: “The real estate agent who sold me the house told me when he quit his job in the agency: “You know, I really have to tell you that you’re about to lose everything.” I didn’t understand what he meant, not even my husband saw it coming. Nobody did until I lost the trial.” [1] • Stage 2: • Kaos, avmakt, forsvar av etablerte livsstiler • Sannhetens øyeblikk  fase 3: “My father and aunt had both guaranteed for my business debts, as I had done myself with my private property. When I was made bankrupt my father had to sell the house and move to a retirement home. It was tragic. He didn’t speak to me for years. My aunt had to sell her house and move to a retirement home, too. My own house went on a forced sale. Everything was lost. My marriage broke, and my wife and child moved to another town.” [32] • Stage 3: • Consolidatingtheidentity as a defaulter • “Fourteen days ago I got one of those letters: pay within two weeks or else.. Well, I’ve heard it before. I can’t let it upset me. If I did, I would not be here talking to you. I’d been six feet under, you know”

Stage 1 • Financiallyrational action • Ethos: Do not do anythinghasty • Business as usual • Øke Increasetheincome: extrajobs • Reducingtheexpenditures : invisible items • Sosial orientation: The ostrichapproach “My wife comes from a poor country. I always took a pleasure in buying her things like expensive clothes. .. Her family is poor, so over the years we have tried to help them out economically .. When our economy got strained we behaved as if we had enough money. There was less shopping and a little less support to my wife’s family. But I knew we spent too much .. Our friends were surprised when I went bankrupt.” [45] “Well, I just hoped I would eventually come across something smart to do and get away with it .. I thought some of my debt eventually would be out-dated and eradicated.” [28]

Stage 2 • Financiallyrational action • Increasingtheincome: newjob, more job, education • Reducingdebts: sellthehome, thecar, savings • Big reduction in consumption • Hjelp from family and friends: limited • Sosial orientation: • The Ostrichrevisited: • “I rented a very nice flat in the same area that was equally exclusive .. It was convenient since my daughter’s school was nearby. But it was expensive .. My daughter could have a student’s loan. We spent that” [1] • Avoid stigma • Move to another city (Oslo) • Psychologicallyextreme: run away (changeofaddresses, France, India) • Avoidsocialsecuruty, courtrooms, not readmail • Hide as muchof it from theemployers

Stage 3 • Financiallyrational action: • No longer anypoint in trying to serve thecreditors • Strategic market behaviour: • Not acceptincreases in one’ssalary, not takeonadditionaljobs or change to betterpaidjobs • Still: A changeofjobsmay be convenient • No longer my problem • Sosial orientation: • Single outthe most importantbills “When I find bills in my mailbox I couldn’t care less, you know. I sort out the important bills and pay them with a smile. As for the rest of them, I must confess, I recognise the envelopes and leave them unopened. I throw them in the dustbin. • Takecareofoneself • “Yes, I do allow myself to have dinner at a restaurant and spend some money in that way. It’s something to look forward to, you know. Each month when I get my salary I do it.” [1] • Takecareofthechildren • “There are children around, and that’s where the problems start as far as I’m concerned. That’s the only thing I really care about. I’ve tried my best to prioritise the use of money to minimise the effects my debt problems have on the family.” [80]

Making theillegitimatelegitimate • Problem: The repayment norm is valid in the life world, too • First: make a division between formal debts and debts of honour • Formal debts: the system world • Debts of honour: The life world – close relations: • “I don’t pity banks .. Had I borrowed from a common acquaintance without paying back, my friends would tell me right away what a bad person I am .. Debts of honour directly characterise you as a person. This you-and-me moral is much stronger than when dealing with banks. If I had treated my friends as I treat my creditors I would get loads of reactions — well deserved ones, too, as I see it.” [99]

Formal debts: Story Telling Next: introducing a new moral principle: Paywhatyoucanwheneveryoucan

Mistrust • The stories are not accepted automatically • Comes on top of the financial and social losses in stage 3 • All coping is marked by dissatisfaction and disappointment • Negative experiences with individual creditors are generalised to institutions and the system world as a whole • Especially among those who tell productive stories

Mistrust in Creditors • Business-wise: • “And the bank had all the information they needed, they checked and double-checked. They knew the risks involved. So why can’t they take on some responsibility? Why only me?” [23] • Be considerate: “The bank forced us to sell the house when the price level was at its lowest. If they had allowed us to keep the house, today’s value would surely have exceeded my debts and everyone would have been happy. Instead, they swept us under the carpet and ruined the whole family.” [32] • The right to live: • “Hey, when are you going to pay? Look how much you owe us, take a look at this paper! They refused to listen to me. That I had a right to live was no concern of theirs. That’s the feeling they gave me. It’s very bad.” [8]

Mistrust in the System • The welfare system: “I felt like being trampled on .. They were parsimonious. I didn’t get what I felt I should have, and I knew others who got more than enough. I felt unfairly treated.” [5] • Politicians: “So who is to blame? It’s politics, the deregulation and release of credit .. The labour party Minister of Finance who weeded out the problems created by the former Right Wing Government in such a way that the banks went bankrupt and the government took over all the shares. And now they got billions up their asses, right? And the properties [we lost] are now owned by the banks.” [1] • The whole ”system”: • “And I’ve been to meetings and meetings and meetings, and there’s been loads of waffle, and in the end I simply lost confidence in the whole system because I find myself without legal rights.” [32]

Social Responsibility Avoid stage 3 .. • Mistrust • Integration is threatened • Defaulters, creditors, society: everybody loses

Existingsolutions Stage 3 Stage 2 • Money collection • Legal protection • Social programs • Financial counselling • GjeldsVoluntary debt negotiations: ca 10.000 cases in 2006, including ca 2.000 that found no solution and were transferred to the court • The Debt Settlement Act • Money collection • Market solutions • Private debt counselling • Refinancing • Bank2 • Legal protection • Social programs • Financial counselling • Ca 18.000 cases i 2006 Bridgingthe Life World and the System World

Coping with severe debt problems