Why is there no point in having a special law for "personal bankruptcy"?

(Notes on the discussion of the idea in the media, statistics, the Quran and the Bible)

Author: Krasen Stanchev

"The matter I am considering is the same as that which Thomas Hobbes had in mind, only it is more immense."
- Woody Allen

Besides the analogies "that's how it is in the USA", "I experienced this bankruptcy there", "many EU countries have such a law", more specific arguments "in favor" have recently appeared:
- "the problem is huge";
- "Bulgaria is in the top four or top five in household indebtedness"
- in Europe, work is being done to "give debtors a second chance" and "fair satisfaction to creditors."

The last two phrases are a repetition of a speech by the Commissioner for Justice, Consumer Protection and Gender Equality, Viera Jourová, in which she called in 2015 for a discussion on a reform of the insolvency procedures regulated by EU law since 2000. (On the subject of personal insolvency, this speech only says that in the US the procedure is fast and should be studied.)

Facts and reality

"Household indebtedness" can mean two things:
a. household liabilities (credits) to GDP and/or
b. non-performing loans of households.
None of these indicators speak of a "huge problem" or "peak" of liabilities.
- According to EUROSTAT, household debts in our country are about 20% of GDP;
- Their share is slightly lower only in Romania (about 16.5%) and Hungary (almost as much as in Bulgaria);
- Households in Lithuania and Latvia are slightly more indebted;
- Estonian households are twice as indebted (for example);
- and those of the EU are three times more indebted than Bulgaria;
- If this indicator suggests something "bad", then the worst should be Denmark, Cyprus, the Netherlands and the United Kingdom, not Bulgaria.

- In generally wealthier countries and those from "old" Europe, this indicator is significantly higher than the levels of household debt to GDP in "new" Europe.

- Logically, with few household debts as a share of GDP, Bulgaria should have been at its best in 1997. Then these debts were 0.9% of GDP.
- Between 1998 and 2002, these liabilities gradually increased to 4.1% of GDP, then until 2007 the value of the indicator doubled every two years and reached its highest values in 2013 (31.8% of GDP).
- Over the last five years, household obligations have been decreasing and this is an almost universal trend in the EU.

Regarding the indebtedness of households on non-performing consumer and housing loans, i.e. in the second meaning of "indebtedness" mentioned above, the BVB statistics show the following:
- After 2015, non-performing consumer loans fell from around 15% of all such loans to below 8%;
- For residential loans, the dynamics are the same for the same period – a decline from almost 12% of this loan portfolio to under 6.5% of it;
- In these loans, which are mainly loans to households, there is a general trend of decline in the share of non-performing loans, which during the recession (November 2008 - mid-2010) reached almost 1/5 of the loan portfolio, and in 2014 they were 17% of it; at the end of 2017 10%;
- In the total amount of non-performing loans, the share of corporate loans is ¾.
Bulgarian legislation implements European rules well. Future harmonization, if necessary, should take into account these specificities of Bulgaria.

Other comparisons

- In Bulgaria, households' financial assets are higher (by about 31%) than their liabilities. Other such countries in the EU are Hungary (with almost the same ratio of assets to liabilities), Italy, the United Kingdom and only to some extent Belgium, Latvia and Malta.
- However, the household debt situation in Italy is much worse than in Bulgaria. But for a large group of countries, for various reasons, the situation is drastically different - financial liabilities are significantly (from 10 to 50%) more than their assets. And this is the case in Sweden, the Netherlands, Spain, Denmark, Poland, Portugal, Ireland, Greece and Finland (arranged here in order of complexity of the problem).
- The dynamics of these indicators (the ratio of assets and liabilities of household finances, their loans to GDP and the share of non-performing loans) have a much deeper economic meaning than the advocates of the idea of "personal bankruptcy" suggest.
- The growth of debts obviously correlates with the size of their and the country's income and a means of increasing this income. In other words, if low values of this indicator are considered "good", then in Bulgaria 1997 would be the best from the point of view of protecting the debtor's rights (since there is nothing to protect). In fact, however, people have no income, their savings are depreciated, their property too, and they cannot qualify for any loan on affordable terms.
- Bulgaria is closer to the EU average (4.2% of the relevant loan portfolios) share of non-performing loans to households, with their 6.5% housing loans and 8% consumer loans (the difference between the two types is logical) and looks better than many countries.
- In Italy, the high share of non-performing loans is largely explained by the high level of debtor protection and the slow process of realizing receivables.
- The household debt-to-income ratio in Bulgaria for the last thirteen years was highest in 2009 (43.4%) and then fell to 32.7% of income.
- These are debts to all possible creditors, not just banks, which are incorrectly the only ones talked about in connection with "personal bankruptcy."
- Another important circumstance is that from 2006 to 2016 (when the EUROSTAT data were summarized), the financial assets of Bulgarian households increased three times – from 22 to 66 billion euros. (Similar dynamics are only in Slovakia.)
- There is no other country with such a growth in these assets, in Greece they decreased during this period, and in Italy they remained unchanged at the beginning and end of the period. This is clearly seen in the following table.

What to do?

In Bulgaria, household financial assets not only increased threefold in ten years, but are also higher in absolute value than those of households in Estonia, Croatia, Slovenia, Latvia and Lithuania (although the population there is smaller).
But in terms of the size of the assets of an average statistical household, the situation is comparable.

From an economic point of view, personal bankruptcy would make sense to apply under three interrelated and influencing conditions:
- when the liabilities of households (individuals) are a significant share of GDP,
- the share of their non-performing loans is increasing or is significant, or is stagnant,
- and their financial assets are decreasing, accumulating slowly, and household debt is increasing its share in their income.

None of these conditions are present in Bulgaria.
What can still be done and more detailed data, read in my article, from which I took the title here, in Manager magazine, issue 234, April 2018.

The post was taken from the author's Facebook profile.

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