For poor people with high debts, sustainable restructuring has so far hardly been possible. The government is now proposing a way out: a reorganization process with waiver of the remaining debts after four years.
Once you’ve ended up in over-indebtedness, you often can’t find your way out.
Anyone in Switzerland who is deep in a financial hole will find it difficult to get out of it sustainably. Although there are also inheritance and bankruptcy proceedings for private individuals, critics say such proceedings are often out of the question in practice for serious cases. In many cases, the procedure via a judicial composition agreement is considered too expensive for private individuals. And the private bankruptcy is denied to penniless people if they can not make an advance on costs. In addition, private bankruptcy with loss certificates does not bring a sustainable solution, because those affected can still be sued for their debts afterwards.
Experts have therefore been calling for a long time simplified ways out for heavily indebted private individuals. A core idea behind it: The realistic prospect of a debt-free life could increase the work motivation of those affected, since every additional franc above the subsistence level no longer has to be returned to the creditors immediately. The country association OECD also had a reform in Switzerland recommended. In 2018, the Federal Council also had a parliamentary mandate report Need for action identified. As a result, the parliament referred at the invitation of the Federal Council two motions with the mandate to the government to submit a legislative project on simplified restructuring procedures for indebted private individuals.
Two new instruments
On Friday, the Federal Council has its concrete Suggestion sent for consultation for an amendment to the Debt Enforcement and Bankruptcy Act. The government wants to create two new instruments. For debtors who are not subject to bankruptcy (because they are not entered in the commercial register), simplified debt restructuring proceedings should be possible. A prerequisite for a partial debt relief in such a procedure would be the approval of a qualified majority of the creditors, as in the ordinary debt restructuring procedure. The simplifications concern, among other things, the possibility of waiving creditors’ meetings, court hearings and securing privileged claims.
The most striking innovation is that the Federal Council is proposing bankruptcy restructuring proceedings for over-indebted private individuals with no prospect of succession proceedings. The debtor must hand over all attachable funds to the creditor over a period of four years and prove his efforts to generate a regular income. After these four years, the remaining debt expires. The Federal Council provides for certain exceptions to the debt collapse – namely in the case of fines, maintenance payments under family law and reclaiming unjustified social assistance. In order to limit misuse, a blocking period of 15 years applies after the conclusion of a restructuring procedure until the procedure is repeated.
The proposed changes in the law “will not solve the problems of over-indebtedness and poverty,” admits the Department of Justice in its explanatory report a. But the federal government is hoping for a positive effect. With reference to debt relief, he speaks of “opening up a second chance” for the over-indebted. The federal government expects economic impulses due to the increased employment incentives for those affected. According to federal information, most European countries have a debt relief procedure for private individuals. The quoted research literature on foreign experiences provides indications that relaxing the rules on debt relief promote entrepreneurship.
More expensive loans?
But as almost everywhere else, conflicting goals can hardly be avoided. Faster debt relief also means a faster loss of claims for creditors. In the case of heavily over-indebted people, however, the creditors often receive little or nothing even without formal debt relief. And creditors could also benefit from increased work incentives for debtors. The federal government is counting on the benefit of the debt relief for the debtor outweighing any damage to the creditors.
However, facilitating debt relief could also make access to credit more difficult. According to the Federal Council, some of the international literature on the effect of debt relief procedures has identified higher credit hurdles or a slight increase in prices, but this weighs less heavily than the positive effects.
According to the Federal Statistical Office, around 15 percent of private households in Switzerland are in arrears. An external one appointed by the federal government elevation by the Bern-based research office Ecoplan provides data from the perspective of the creditors. According to this, around 6 percent of private individuals in Switzerland have at least one loss certificate. These loss certificates are managed by collection agencies or the creditors themselves. Ecoplan estimates the number of loss certificates at several million and the amount of money involved at around 20 billion francs. According to Ecoplan, the debt collection industry reported incoming payments for an average of 17 percent of the receivables; in around 60 percent of the cases, no money comes in at all. The most commonly mentioned categories of debt are taxes, health insurance premiums and bank loans.