Harmonising Personal Insolvency Laws:
Supporting Over-Indebted Families Across the EU
COFACE-Families Europe has been working on tackling over-indebtedness considering its impact on families’ well-being. Besides prevention, personal insolvency laws have a profound impact on families, particularly those in vulnerable situations, including families with children, families with disabilities, and low-income households. While business insolvency has been partially harmonized at the EU level[1], personal insolvency remains fragmented across member states. This fragmentation leads to inconsistent outcomes, exacerbating the financial difficulties of over-indebted families and undermining social cohesion.
The Need for EU Action on Personal Insolvency
Personal insolvency laws play a critical role in determining how individuals can recover from financial difficulties such as over-indebtedness. Poorly designed insolvency laws result in significant social consequences, including increased stress, mental health issues, and even suicide among over-indebted individuals. For families, these challenges can lead to severe hardships, affecting children’s well-being, exacerbating disabilities, and deepening vulnerability.
Research indicates that over-indebted people are much more likely to suffer from severe health conditions like depression and heart disease[2]. This not only strains social welfare systems but also reduces economic productivity and weighs heavily on families’ well-being. Children in over-indebted families may face increased poverty, social exclusion, and reduced educational opportunities, perpetuating a cycle of disadvantage.
The economic and societal costs of ineffective personal insolvency frameworks are substantial. Prolonged insolvency procedures can lead to low recovery rates for creditors and extended financial distress for debtors. This hinders economic growth by preventing over-indebted individuals from re-entering society and the workforce. It also damages the social fabric by increasing strain on interpersonal relationships and community cohesion.
Moreover, the lack of harmonisation across the EU encourages “forum shopping,” where debtors relocate to jurisdictions with more favorable insolvency laws, undermining the fairness and effectiveness of the system. This legal fragmentation creates uncertainty and inequality among EU citizens, impacting families who may not have the means or ability to relocate.
Such a call for harmonisation has already been stressed by the FSUG[3] (Financial Services Users’ Group) and Finance Watch[4], of which COFACE-Families Europe is a member.
Impact on families in vulnerable situations
Personal insolvency disproportionately affects families in vulnerable situations, including those with low incomes, single-parent households, families with disabilities, and those facing unemployment or health issues. Over-indebtedness can lead to housing insecurity, inability to afford essential services, and social exclusion.
For families with disabilities, financial difficulties may limit access to necessary care and support services, exacerbating their challenges. Children in over-indebted families may experience stress, stigma, and reduced opportunities, affecting their long-term development and prospects.
A harmonised EU approach to personal insolvency would help mitigate these impacts by providing consistent protections and support mechanisms across member states. It would facilitate the reintegration of over-indebted individuals into the economy and society, reducing the intergenerational transmission of poverty and social exclusion.
Relevance for implementation of the European Pillar of Social Rights
The European Pillar of Social Rights emphasises the right to social protection and inclusion for all citizens. Addressing personal insolvency at the EU level aligns with these principles, promoting social justice and economic stability. Harmonising personal insolvency laws would ensure that families, especially the most vulnerable, have access to fair and supportive mechanisms to overcome financial difficulties.
By upholding the Pillar’s commitments, the EU can strengthen social cohesion, reduce inequalities, and support the well-being of families across member states. This alignment reinforces the EU’s dedication to fostering inclusive growth and protecting citizens from adverse economic circumstances.
A need for European harmonisation
In the context of ongoing discussions at the EU level regarding financial legislation and social policy, including the priorities of the European Union to achieve a Capital Markets Union, there is a growing need for harmonising personal insolvency at the EU level. With the potential for new laws or consultations under the new European Commission, it is crucial to address personal insolvency comprehensively.
This focus aligns with the EU’s broader objectives of social inclusion, economic resilience, and the promotion of the European Pillar of Social Rights. By engaging in this dialogue now, the European Union could contribute to the development of a framework that supports families in overcoming financial hardships. COFACE-Families Europe will continue to reflect on these key societal issues in cooperation with other key organisations such as Finance Watch, in order to ensure all families are at the center of policy discussions, advocating for fair and inclusive solutions that address over-indebtedness. By prioritising harmonised personal insolvency laws, the EU can take a significant step towards fostering economic stability, reducing social inequality, and ensuring that all families have the opportunity to thrive in a supportive and cohesive Europe.
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[1] https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32019L1023
[2] Holmgren, R., Nilsson Sundström, E., Levinsson, H., & Ahlström, R. (2019). Coping and financial strain as predictors of mental illness in over‐indebted individuals in Sweden. Scandinavian journal of psychology, 60(1), 50-58.
[3] https://finance.ec.europa.eu/system/files/2023-09/fsug-opinions-230911-personal-insolvency_en.pdf
[4] https://www.finance-watch.org/policy-portal/retail-inclusion/from-debtor-prisons-to-being-prisoners-of-debt/
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**DISCLAIMER: All opinions in this article reflect the views of the author, not of COFACE Families Europe**
About the author: Martin Schmalzried is the Senior Policy and Advocacy Manager Financial Inclusion and Services at COFACE Families Europe.
