Problematic debts: causes and solutions

17 January 2017

It is not unusual to be in debt in the Netherlands. Approximately 4 million inhabitants (out of a total of 17,5 million) have mortgages and annually tens of thousands of students receive study loans. But those are not necessarily problematic debts. We define problematic debts as those debts that people are not able to repay within 36 months. The problem is not caused by the volume and nature of the debts, but by the behaviour of persons in debt and their capacity to repay.

An estimated 1,4 million households in the Netherlands suffers unsecure debts, problematic debts or is already in debt counselling procedures. This concerns 1 in every 5 Dutch households. The group of indebted people however is changing. Where before it consisted mainly of people on social benefits or workers with very low incomes, since the start of the credit crunch in 2008 the number of people in debt with average or higher incomes increased. Redundancy, divorce and the housing market crisis combined to cause their financial problems.

Although multiple ways exist to support people in debt, a clear definition of debt prevention is still lacking. Professor Nadja Jungmann defined it as ‘the mix of measures, activities and provisions aiming to create people with financial skills who behave skilfully and keep their finances healthy. So in fact debt prevention is all about promoting healthy financial behaviour.’

Probable causes

Although the blame is attributed to the indebted person, in reality the probable causes are much more complex. Indebtedness is strongly influenced by external circumstances: the economic situation, complexity of society, living in a situation of structural poverty or the preferential position of specific creditors. Indebted people’s behaviour can be distinguished in conscious and unconscious behaviour. Whereas attention is usually paid to the conscious behaviour – motivation, knowledge of finances and skills – recent research points at the important impact of unconscious behaviour. People’s choices are based on their feelings, unconscious processes, other people’s behaviour and the way in which decisions are made. There is a link between life-events and debts, particularly in situations where incomes drop. And finally of course personal factors – minor learning disabilities or mental problems – may cause people to be unable to live without debts. Once people are in debt, the debts, like the problems, seem to accumulate, not only because people try to solve one problem by creating another one, loaning more money, but also because additional fines and administrative charges and punitive action such as eviction increase their burden. It is difficult to put a halt to these fines and charges, which are usually imposed by local and central governments.

Who is to blame: Guilty on Tour

In Calvinist countries like the Netherlands, being in debt is often seen as people’s own fault. They are to blame for their situation and should be punished by paying fines or additional charges. Whereas in reality this punishment is not a solution but only increases the problem. To increase the general public’s understanding of the issue, a documentary series was broadcast on Dutch television concerning indebtedness. It introduced a number of indebted people in a poor neighbourhood in Amsterdam and other stakeholders – social workers, bailiffs and social security services – explaining their situation and what caused their debts. The documentaries, named Guilty (Schuldig), are followed by a series of regional Guilty on Tour debates in which the documentary is used to address the issue with a wide group of regional and local stakeholders. Movisie is a consultant for the Guilty on Tour debates and will prepare a publication based on the findings. The debates also generate quite a lot of political and media attention at national level.

Effective solutions

In general policies in the Netherlands focus on self-reliance and empowerment of citizens. But in the case of indebtedness this is not the proper mind-set. People would have benefited from assistance before their debts became too much for them. So the effective solutions would include preventative action.  We need to understand the impact of living in poverty and under duress, and make more efforts to support people instead of punishing them. We should also be aware of perverse incentives, for instance when people who take someone in to look after, are cut back on their social benefits because they share housing. And of course we should end the accumulation of fines and administrative charges.

Movisie created a file (in Dutch) in which effective measures and approaches are collected that help people with debts. The file pays attention to various aspects of both material and immaterial debt counselling, prevention, early detection and regulation. It informs readers of both causes and consequences, and provides an update of the social debate concerning indebtedness in the Netherlands.

For more information please contact Hanneke Mateman or Christine Kuiper.