Excessive debt must be prevented by comprehensive social policy

Over-indebtedness can do serious, far-reaching damage to individuals, families and societies. For this reason, more decisive steps should be taken to prevent excessive debt and mitigate its consequences, says Heikki Hiilamo, professor of social policy at the University of Helsinki. He has studied the households' over-indebtedness in the UK, US, Finland, Norway, the Netherlands and Germany.

According to Hiilamo’s research, over-indebtedness impacts both individuals and society, in the form of economic hardship on one hand and the shame associated with over-indebtedness on the other. Lack of money means that people under excessive debt have less opportunity to participate in society and fix their financial situation.

 “In addition, excessive debt increases dependence on social benefits and makes it harder to acquire an education. On a broader scale, excessive debt hinders economic growth, while also hurting the financial markets and the real estate market," Hiilamo explains.

Catastrophic impact unless something is done

According to the professor, shame associated with over-indebtedness is linked to mental health problems and other illnesses, prolonged unemployment, relationship problems as well as the burden of excessive debt being passed on to the next generation. At the same time, excessive debt is reducing general social trust while eroding the potential for innovation and increasing public spending.

“We should address excessive debt now that households are incurring more debt as a result of low interest rates in many countries. Without decisive action, the impacts of the next financial crisis may be catastrophic,” Hiilamo states.

Chance to start over in the US

The United States is the best country for starting over after incurring excessive debt. The opportunity to quickly get away from debt compensates for the underdeveloped social security system in the country. However, the failings of the health care system and lack of student benefits are significant causes for excessive debt in the US.

Finland harsher than other countries

Hiilamo’s report indicates that Finland is harsher on people with excessive debt than countries such as the UK and the US. Finnish legislation does not recognise personal bankruptcy, meaning that the poorest over-indebted people have to wait at least 15 years before their debts expire. In Finland, debt settlement takes a longer time than in other countries. The same applies to the final expiration of debt.

The prevention of excessive debt and the mitigation of its consequences requires that over-indebtedness is recognised as a risk that must be taken into account in social and health policy systems.

“Over-indebtedness should not be viewed exclusively as a legal issue. It requires comprehensive analysis in terms of social policy, including systems of wealth redistribution and public services in addition to legislation pertaining to insolvency.”

A recent book, entitled Household Debt and Economic Crises: Causes, Consequences and Remedies studies the over-indebtedness of households in Finland, Norway, the Netherlands, Germany, the UK and the US. It is published by the British academic publisher Edward Elgar Publishing.


Further information:

Heikki Hiilamo

Tel. +358 40 3587203