Statistics show that close to one in ten adults face financial execution. Against this backdrop, MPs are set to debate amendments to the Insolvency Act which aim to make it easier for people to qualify for debt relief – and thus avoid declaring personal bankruptcy. But are so many Czechs really in debt up to their ears?
A study by the non-profit Open Society found that no fewer than 836,000 people in the Czech Republic were under some form of distraint last year, meaning that some of their property had been seized as compensation to creditors for overdue payments.
Against this backdrop, the government wants to introduce more lenient and flexible debt relief models. Currently, a person who pays off at least 30 percent of their debts within five years is eligible for debt relief. Their remaining outstanding debt is then forgiven.
Parliament is debating introducing a “fast-track” model that would let allow a person who repays half their liabilities in three years to qualify for debt relief. There is also a proposed “no-limit” model with a seven-year timeline with no minimum set on the amount to be repaid.
But the reality of indebtedness is far rosier than the statistics would imply, says Czech Chamber of Commerce deputy chair Irena Bartoňová Pálková.
“The data are very misleading. Included in that massive figure of nearly 900,000 people under financial execution are many who declared personal bankruptcy but already have repaid their debts. The data also include people who have died. In repaying debts, actually we rank second in the EU, right after the Germans. So, it is very misleading to speak of a tenth of Czechs in financial execution.”
On the whole, the system in place since 2008 is working, she says. Further reducing the amount debtors must repay to qualify for debt relief unfairly impacts creditors and the state – i.e. taxpayers.
“Of some 150,000 borrowers who have entered into personal bankruptcy, more than half, about 56 percent, pay back the majority of their debt on schedule. Another 25 percent even pay 100 percent of what they owed. So it is clear that the personal bankruptcy system works.”
While the average principal in distraint cases is CZK 65,000, according to the Open Society study, in 2017 half of debtors owed less than CZK 10,000, most of which related to costs and interest.
The government should rather focus on helping prevent people from falling into “debt traps” in the first place, Ms. Bartoňová Pálková says. In part that means ensuring that loan terms – and the consequences for breaking them – are more fair to and understandable for the average borrower.