Study on means to protect consumers in financial difficulty: Personal bankruptcy, datio in solutum of mortgages, and restrictions on debt collection abusive practices

Practice Area: Finance
Client: Financial Services User Group via DG Internal Market and Services
Published: April, 2013
Tagged: EC/EEA

Commissioned on behalf of the Financial Services Users Group by DG Internal Market and Services, and authored by London Economics, this report examines all formal debt reduction solutions which allow consumers to return to a financially sustainable path by eliminating some or all of their debts, including providing a comprehensive description of:

  • the availability and use of personal bankruptcy and datio in solutum solutions of mortgages as legal solutions to problems of over-indebtedness faced by a number of consumers in the EU; and,
  • the legal framework under which debt collection institutions operate, in particular any restrictions on debt collection abusive practices.

The study details the nature of the solution, the conditions the debtor needs to meet to access the solution, the legal, financial and other consequences of having used a particular debt solution, and the effectiveness of such solutions in practice, and identifies best practice models.

Personal bankruptcy is found to have become more widespread across Europe, although with radically different applications, which permits ‘bankruptcy tourism’ and a two tier systems where those with enough liquid resources can move to other jurisdictions whilst those who cannot are reliant on domestic processes. Best practice is identified as a short, non-court-based process operating under clear rules, with debt cancellation occurring during a short repayment plan.

The only country where we can identify datio in solutum legislation is Spain. This is extremely limited in terms of who can apply to it and the requirements they must meet before becoming eligible. Our review suggests datio in solutum delivers greater benefits to consumers than no debt cancellation system, but the best practice debt cancellation model described above and a model of mortgage forbearance applied by all lenders appear to deliver even greater benefits to consumers.

In relation to debt collection the guidance offered the UK OFT appears best practice: Whilst it does not cover all the areas in the report, its approach and up-to-date consideration of new areas, such as social networking sites, appears a good method of communicating what is permitted. The model of a lead agency responsible for debt enforcement with duties to publish and maintain up-to-date comprehensive guidance on best practice and what is permitted offers significant benefits in terms of clarity, both for debt collectors and debtors. Equally the model deployed in many countries where those who engage in debt collection are registered to allow the lead agency to monitor effectively appears best practice.