Sweden may not be a country associated with over-indebtedness but recent reports raise concerns about levels of Swedish household debt and the appropriateness of current debt restructuring procedures for individuals unable to repay their debts.
First, a recent report by the Swedish Riksbank indicates that the aggregate debt-to-income ratio has risen from 90 to 174 percent since 1995 and is expected to rise further. The intriguing question is the distribution of this debt among the population.The Riksbank found that among those with mortgage debts individuals and households with lower incomes have the highest debt-to-income ratio. Significant numbers of older individuals and those living in non-metropolitan areas also had high debt-to-income ratios. The report concluded that high indebtedness is widely spread in the Swedish population and not restricted to high-income earners (whose debt may be balanced by higher assets) as suggested by a 2013 official investigation of over-indebtedness. The primary concers of the Central bank are the effects on financial stability and the general economy and the report may have responded to IMF concern about a potential housing bubble in Sweden. The Riksbank has required Swedish banks to hold greater capital and increase loan-to-value ratios.
The Swedish individual debt restructuring process, an administrative system operated by the Swedish Enforcement Authority , has high barriers to entry for an over-indebted person and normally a required repayment plan of five years before a discharge of debt. A ‘qualified insolvency’ test requires the decision maker to determine whether an individual might be able to repay the debts in the foreseeable future, traditionally interpreted as 15 years, and also whether the conduct of the debtor was reasonable. One consequence of these criteria is that few younger debtors were able to access debt reconstruction and the discretion to shorten a plan appeared to be exercised only for individuals who are seriously ill or heavily indebted retirees. The great majority of individuals accessing the procedure are over 50, a sharp contrast to other European countries.
An official report (‘Out of the Debt Trap’) in 2013 investigated this system of debt restructuring against a background of concern that there were ‘perpetual debtors’–individuals who had been on wage attachments for many years or repeatedly been subject to wage attachments or had no attachable assets and qualified for debt restructuring–but had not applied for debt restructuring.
The main proposals of the Report (here) are that a more nuanced approach should be adopted towards the application of the qualified insolvency criteria, that the present procedures be simplified (e.g.online applications, a single payment to the agency who would distribute to creditors) and greater efforts be made to indicate the possibility of debt reconstruction to those who might qualify. Greater assistance through budget and debt counselling is also deemed necessary and the report raises the possibility of an individual being able to resort to debt reconstruction a second time (but only in exceptional circumstances). Currently this is not possible.
Although the report proposes more flexibility in plans with the possibility of shorter plans, the examples it provides of where this would be appropriate- “heavily indebted old-age pensioners and debtors who are seriously ill”-do not indicate a substantial change in practice.
Increasing numbers of individuals in Sweden are making applications for debt restructuring (from 6589 in 2009 to 9184 in 2013). This still represents a rate of under 1 per thousand capita (compared e.g to England at over 2 per thousand). The Report argues that a substantially larger number of potential users exist.
Even if the proposed changes are enacted the Swedish system of debt restructuring will remain relatively restrictive. Moreover debt advice is primarily the responsibility of municipalities and its coverage varies throughout the country with long waiting lists in some municipalities. It is not clear why the Swedish system is so tough. The idea of maintaining ‘credit discipline’ and ‘payment culture’ have been cited to me but there seem to be already significant numbers of casualties within the existing system, there is little evidence that more liberal insolvency systems result in substantial ‘moral hazard’, and there are many other techniques (credit scoring, bureaux etc) for maintaining credit discipline.