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Beyond the active and passive debtor: New study by Bank of France

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Iain Ramsay

http://www.kent.ac.uk/law/people/academic/Ramsay,_Iain.html

Policy making in bankruptcy is driven by assumptions about debtors and their reasons for over-indebtedness. If debtors are assumed to be imprudent or unable to manage their finances then financial education might be a solution. If the primary reason is unemployment or a change of circumstances then budgeting advice may be of little assistance and a better safety net could be developed. During the 1990s and noughties the Bank of  France regularly published statistics on the reasons for overindebtedness. They divided the reasons into two categories; active and passive overindebtedness. The former included over-spending and bad budget management, the latter unemployment, divorce/separation and illness. By the mid 1990s  it appeared that passive over-indebtedness dominated the reasons for overindebtedness. This finding had several policy implications. First, it meant that neither creditors nor debtors could be blamed for overindebtedness. It provided common ground between creditors and consumer groups.  Consumer groups argued that the growth in those using the over-indebtedness commissions reflected the fraying French social safety net. The dominance of passive over-indebtedness also justified greater liberality in discharge of debts.    Debtors were not attempting to take advantage of the system but rather were victims of circumstances beyond their control. Financial institutions could argue that it was not necessary to introduce positive credit reporting (see discussion here) because problem debt arose as a consequence of events which occurred after credit was granted

The active/passive distinction depended on both the validity and reliability of the Bank of France statistics and the coherence of the distinction.  In 2010 the Cour Des Comptes (National Audit Office) published a searing criticism of the validity and reliability of the Bank statistics. For example, if a person was divorced the Bank seemed to always classify them  as passively indebted even if the divorce occurred many years before the debt problems! More fundamentally the Audit Office questioned the coherence of the simple active/passive distinction since there might often be a combination of events which leads to an inability to repay. As a consequence of this critique the Bank stopped publishing statistics in its surveys of debtors on the reasons for the over-indebtedness.

The Bank has now published a new study on the paths leading to over-indebtedness, conducted by a consultancy firm. This provides a more complex typology of reasons for individuals using the over-indebtedness commissions. Unemployment or reduced employment (23%); budget constraints (17%), and  inappropriate use  of credit (14%) are significant reasons.  But the  largest percentage (41 percent) represent a conjuncture of events including  a change of circumstances with some individuals not adjusting effectively their budgets to these changes. Some of the budget constrained group also seemed to make impulsive purchases.  A comparison group of similar individuals who had not accessed the Commission seemed to manage their budgets slightly more effectively.  An underlying theme in the report is that behavioural limitations of debtors are a significant driver of a spiral of over-indebtedness. The Bank uses these findings  to justify greater financial literacy education, which of course has become a worldwide crusade.

The findings deserve more extended scrutiny than is possible in this blog.  What is most interesting however is  how the French policy making community managed to sustain for so long the defective active/passive distinction and its implications for policy making.   A characteristic of  the development of French policy making on overindebtedness is its management by the French technocracy through the Bank of France and Consultative Committees. Dialogue takes place within these groups, with critiques coming from within the technocracy (such as the Cour des Comptes). The absence of non-state initiated studies of bankrupts  in France, and the limited role of interdisciplinary studies in the French legal academy reinforce this approach.  This means that the overt ‘war of ideas’, which characterised  US bankruptcy policy making in the period before the Bankruptcy Abuse and Consumer Prevention Act of 2005, does not occur in France.  In my forthcoming book (here) I compare these different policy styles, and the role of social science knowledge within them, as part of understanding the paths of bankruptcy law development in these countries.

 

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