The over-indebtedness in Germany
(By Verbraucher - Zentrale Hamburg e.V.)

Over- Indebtedness

1. National Legislation

Over- indebtedness in Germany is rising. It is estimated that 3 million households in Germany were insolvent in 2003, while at least 15 million household had serious financial problems. Even though rising debt has been a problem for many years, it was not until 01.01.1999 that Germany developed and regulated an individual bankruptcy scheme. The so called "consumer" or private insolvency was then integrated into the existing bankruptcy act for companies and entered into force as the Insolvency Act 1999 (InsO). Due to that integration, a lot of sections do not apply to individual insolvency but to company bankruptcy only. This is also the reason why the Act has proved partially to be inapt for individuals.
Individuals in this respect are
-all persons who were never self- employed
-all persons who were self-employed before starting insolvency proceedings and do not have more than 19 creditors. Of these creditors there is not to be a former employee with claims arising from employment.

a. Reasons for Over- Indebtedness
Over- indebtedness largely results from a change in financial circumstances, caused by reduced income or overuse of credit. There is a plethora of reasons for over- indebtedness. Unemployment and sickness are often the cause why individuals cannot cope with financial obligations. Divorce and a subsequent additional housekeeping plus payment of alimony is another major cause for over- indebtedness. As there are approximately 2 million divorces a year, potential for insolvency is high.
Small entrepreneurs are also in danger of becoming insolvent. The Germany government is at present vigorously promoting entrepreneurship, and unemployed individuals are funded on various schemes, the most famous one being the “Ich AG”, meaning that one is ones own limited company. In 2003, 165.000 unemployed persons started their own business. However, criteria for being funded are not very strict, e.g. for the “Ich AG” it is sufficient to be unemployed and receive unemployment benefit, but no business plan has to be presented and virtually everyone is funded. Experts are certain that a considerable proportion of these entrepreneurs will become insolvent, either for lack of business expertise or for having insolvent clients. Among young people, the usage of mobile phones is another source for over- indebtedness.
Research demonstrates that people with poor education and a monthly income of up to 1000 € are easily influenced and manipulated by aggressive advertisement (Buy now, pay later) and the growing circulation of credit/ shop cards and overdrafts. Even though banks nowadays do not dish out overdraft and loans as readily as they used to, until 1996, 11.8 million credit cards, 55.7 million debit cards and 40 million store cards were given out. Some of these users are now way into the insolvency proceedings. The combination of poor education and lacking legal education made them an easy bait for banks and department stores, but also for insurance agents, talking them into superfluous and costly insurance contracts. People often do not regard contracts as legally binding but think they have the right to cancel any contract within two weeks or that personal reasons e.g. unemployment give the right to terminate any contract. Likewise, debtors are unaware of the consequences of legal action taken by creditors: legally recognised claims can be enforced for thirty years.
It is therefore hardly surprising that the poorly educated with a low income constitute the majority of over- indebted individuals in Germany. For lack of savings, once hit by unemployment or sickness, they are unable to fulfil their obligations. And with more 4.6 millions unemployed, 1.3 millions of these being unemployed for more than one year, this development is unlikely to come to a standstill.

b. The Private Insolvency Scheme – A Survey
The insolvency scheme is open to individuals regardless of the amount of debt and number of creditors. It is a three step procedure.
Before presenting a bankruptcy petition at court, the debtor is obliged to try and reach an agreement with the creditors. Only if that proposal is not agreed upon by all creditors, the debtor is allowed to submit a bankruptcy petition. The court then decides at his discretion whether it presents the out of court proposal to the creditors again. The court can overrule dissenting creditors in certain circumstances and force them to accept the plan. In this case, the debtor pays off his debts according to the plan without the court making a bankruptcy order.
In all other cases, the court makes a bankruptcy order. For five or six years, depending on when the insolvency incurred, the debtor is obliged to submit to his creditors all seizable income and other assets and live on mere subsistence. This is determined in accordance with the enclosure to section 850c of the Civil Procedure Act (ZPO). The Act guarantees debtors a minimum of money to live on. For example, a single is thus granted 739,99 Euro per month. Any income exceeding that amount is seizable.
The court procedure last for approximately one year. Simultaneously, the repayment or trustee period commences. The repayment periods lasts five years for individuals bankrupt on 31.12.1996 and six years for all other individuals. The whole bankruptcy procedure takes thus either five or six years. An insolvency practitioner is appointed trustee by the court, usually a lawyer or an accountant. The insolvency practitioner is responsible for the disposing of the assets and making payments to the creditors.
Discharge is not necessarily automatic. On certain conditions, creditors can file a petition to court to deny discharge on certain grounds. However, the court cannot investigate of its own accord and will only deny discharge on petition by a creditor. Apart from that, some debts are generally non- dischargeable, e.g. fines or penalties imposed for an offence.

c. The Insolvency Scheme in Detail
Before submitting an insolvency petition, debtors have to try and reach an out of court agreement.
aa. First Step: Out of Court Arrangement
The debtor is obliged to propose a payment plan to all his creditors. To propose such an arrangement, the debtor needs the services of a licensed debt counsellor. Regularly, these are consumer protection centres and welfare organisation which are funded by the state. Depending on the federal state, debtors may have to pay for the debt counsellor. In the state of Hamburg for example, singles with an income of up to 1087 € do not have to pay, while an income of up to 1287 € obliges them to pay to 150 €. Singles having an higher income have to pay a sum depending on the number of creditors. For up to five creditors 310,30 €, for up to ten creditors 430,14 € and for 15 creditors 549,98 €.
Currently, approximately 1.300 of these licensed debt counsellors exist. They employ either legally trained personnel or social workers. Licensed debt counsellors are per se qualified to give legal advise to debtors. This is necessary, since under Germany law giving legal advice is strictly restricted to the legal profession, i.e. lawyers. Thus, lawyers are also qualified to submit payment schemes but seldom do so since they do not receive state funding and would have to be paid by the debtors themselves.
Unfortunately, numerous informal debt consolidation agencies exist, advertising services and assistance in local newspapers. They are intermediaries with no qualifications and as a rule, their advice proves costly and inadequate since they are not eligible to advice debtors in legal matters.
The proposal to creditors can be based on a lump sum offer or on regular monthly or even annual payments, no compulsory content exists. In accordance with the duration of the court procedures, proposed arrangements usually last between five and six years. After that period, discharges relieves the debtors of all debts. Proposals usually give details on the overall debt and name all creditors. Each debt is allocated a quota relating to the overall debt. All creditors have to agree to the proposal, otherwise the proposal is rejected, regardless of how much is owed to disagreeing creditors.
Commonly, debtors have an income below the figures in section 850c of the Civil Procedure Act (ZPO). Accordingly, the proposal presented is a “zero plan”, meaning the debtor cannot afford any payments during the repayment period and the creditors receives zero payments. Nevertheless, after the repayment period, the debtor is discharged all the same. In these cases, which are by far the most, creditors usually never accept a zero plan.
In the unlikely case that all creditors agree, the plan becomes legally binding. Once it is in place, creditors cannot bring any other action against the debtor as long as the agreed payment is maintained. Interest and charges are frozen.
In case a family member acted as a guarantor, a licensed debt counsellor will include a clause under which the guarantor is released from any liability after the repayment period.
In case the debtor has ceded wages to one or more creditors, this has to acknowledged in the proposal, for the secured creditor receives all seizable income for a period of two years. Only for the remaining four years do the other creditors receive any payment at all. Not surprisingly, these plans are rarely accepted by unsecured creditors. Since individuals almost always have to cede their seizable income (wages, social benefit, unemployment benefit etc.) when taking out credit, cession is common. In cases of an employee, the licensed debt counsellor determines whether cession was allowed in the first place: quite often, employment contracts expressly forbid any cession of wages. Should that not be the case, any employee can still enter into an individual agreement with the employer to stop any cession for the future, even after he or she has ceded his wages to creditors. It is strongly advisable to do so since it can raise acceptance for the proposal.

bb. Insolvency Petition and Insolvency Opening Procedure
On the failure of the out of court proposal, the debtor can present a bankruptcy petition within six months of the failure. That date is certified in the petition form by the licensed debt counsellor. They usually fill in parts of the more than 30 pages encompassing petition form. Bankruptcy petitions have to be presented at the Amtsgericht (lower civil courts) of residence. It is usually presented by the debtor, but can also be presented by creditors when the debtor is unable to pay debts as they fall due.
The petition form is complicated and filling it in proves a burden for many debtors, even if some parts have already been filled in by the debt counsellor. Apart from certifying that the out of court proposal has failed, the proposal has to be enclosed and reasons for the failure given. Since creditors as a rule never give reasons, a standard remark by debt counsellors is “The creditors were unsatisfied with the allocated repayment. No further reasons were given”. Secondly, details of creditors agreeing or not reacting at all, have to be given (number of heads and percentage of overall debt).
The debt counsellor is asked to evaluate the likelihood that the creditors will accept the failed proposal when presented again by the court. The court does have the power to overrule disagreeing creditors on certain conditions. Furthermore, if the creditor does not react to the proposal when presented by the court, he is treated as having agreed. Accordingly, a positive evaluation is given when the creditors agreeing or showing no reacting, constitute the majority of heads and value.
Details on cession of wages have to be marked clearly for the above named reasons. Addresses of all creditors have to included, post box addresses are not sufficient in this respect since under Germany law, courts cannot serve upon post boxes.
While all of these details are usually provided by the debt counsellor, the debtor has to fill in all question concerning assets and income. The debtor has to declare that the form is filled in correctly and completely, if in doubt, the debtor can and should tick the box: “Further creditors might exist, but I am unable to give any more details”. The signed form is registered at the court, and the insolvency opening procedure commences. The judge now decides at his own discretion whether to try and reach an agreement with the creditors on the basis oft the out of court plan. If the court thinks chances are high, the insolvency opening procedure is halted for no more than three months. In case more than half of the creditors in heads agrees (or does not react) and their value of the debt constitutes more than half of the value, disagreeing creditors can be overruled by the court. On the acceptance of the plan, the insolvency petition is regarded as withdrawn. The proposal is legally binding. Only if the plan fails or the judge regards reaching an agreement as hopeless, the actual insolvency procedure is opened.

cc. Actual Insolvency Procedure and Simultaneous Trustee Period
The debtor is obliged to pay court and trustee fees before the court makes the bankrupt order. On petition, the court can defer payment for court fees for the duration of the court and repayment period if the debtor does not have sufficient income. Should the income still be insufficient after the end of the procedure, the court can defer payment for another four years. This means in effect that the debtor is not discharged after 6 years, but has another four years during which he pays off the court.
The court fees are set in relation to the value of the assets at the time of opening and assets obtained during the procedure. For lack of assets other than income, the value is estimated by multiplying the seizeable income per month with the number of months the court procedures last (usually 12 months). However, this figures do not include expenditures such as publishing details on each bankrupt case in the newspaper which cost at least 1000 €.
Fees for the trustee are set in relation to the values of the seizeable income for 12 months (duration of the court and simultaneous repayment period). The trustee gets 15 per sent of that value, but at least 250 € plus a monthly expenditure of 15 per cent of the minimum fee of 250 €.
The bankruptcy order is published in the local press and official journals, the creditors are additionally informed in writing by the court. They are obliged to make formal claims. If they do not do so, the debtor is nevertheless discharged of these obligations.
Making the bankrupt order starts the actual insolvency procedure. Simultaneously, the repayment period starts and an insolvency practitioner is appointed trustee. Insolvency practitioners are as rule not very keen on private bankrupts because the payment is low. However, courts also appoints trustees for company bankruptcy and are inclined to do so only, when an insolvency practitioner does private cases as well.
All assets belonging to the debtor come under the control of the trustee on the making of the order. The creditors can ask the trustee to apply for an order restoring property to him if the debtor disposed of it in way which was unfair to the creditors within the last three months before the bankruptcy order. The trustee is entitled to sell or surrender a life insurance policy and collect any proceeds on behalf of the creditor. He informs the employer that any seizeable income has to be paid to him. He is responsible for the disposing of the assets and making payments to the creditor.
The debtor is obliged to provide the court with all information relating to the financial situation, if he does not cooperate, he can be arrested. The court examines the formal claims made by the creditors in the creditors meeting which in most cases is done in writing. The court legally recognises the claim if the trustee, the debtor or the creditors do not contradict existence or value.
The final meeting arranged by the court takes place at the end of the court procedure. This can also be done in writing. During this final meeting, creditors and the trustee have the last opportunity to request a denial of discharge. The court cannot deny discharge of it’ s own accord but only when asked for by a creditor. However, if it does deny discharge, then the debtor is not released of any debt.
The reasons for a denial of discharge are

1. the debtor has been sentenced for a criminal bankruptcy offence
2. the debtor was discharged before in the past ten years or was denied discharge within that period
3. the debtor intentionally or grossly negligently gave incorrect or incomplete information on his financial situation in the past three years in order to take out credit or to receive state funding, e.g. unemployment or social benefit. In these cases, only the creditor who was put at a disadvantage can ask for a denial of discharge.
4. the debtor in the past year jeopardised either intentionally or grossly negligently the repayment of creditors by entering into inappropriate obligation or wasting money. An obligation is inappropriate when the debtors knows he cannot pay for it when entering into it. It corresponds to the criminal offence of fraud. Wasting money means buying expensive and unnecessary goods before entering into the bankruptcy procedure or giving money away to relatives and friends.
5. the debtor violated either intentionally or grossly negligently his duty to provide information and to co-operate during the insolvency procedure (i.e. the court procedure).
6. the debtor intentionally or grossly negligently filled in the bankruptcy form incorrectly or incompletely. Since that form was intended for company bankruptcy, it is very complicated and one can hardly blame debtors for failing to fill it in correctly.

Non- dischargeable debts are fines or penalties imposed for an offence. Likewise, obligations arising from intentional tort are not- dischargeable provided the creditor made his claim accordingly. However, in such cases, only these debts will remain, but the debtor is released of the rest.

If no requests are made, the court announces that the debtor will be discharged after the repayment period, provided he fulfils his obligations during the repayment period. From this point onwards, the debtor’ s behaviour in the past cannot prevent discharge, only the future behaviour during the repayment period counts.
During he repayment period, the trustee keeps on making payments to the creditors. For this, the trustee is allocated five per sent of the seizeable value up to a value of 25.000 € annually, for any exceeding value up to a value of 50.000 €, he receives three per cent and from any value exceeding that, one per cent. The minimum fees is 100 € annually.
The obligations during the repayment period are the following:

1. the debtor is obliged to work in a job appropriate to his education, capability, health and age. In case he or she is unemployed, he is expected to actively look for a new job and not to reject any reasonable job offer.

2. to hand over to the trustee half the value of any inheritance acquired during
the repayment period

3. give notice to both court and trustee of any change of address or employer and to provide all relevant information concerning income, employment or search for employment on request. Furthermore, the debtor must disclose all assets and any increase in income during the repayment period.

4. pay to the trustee only and not to make payments to any creditor.

At the end of the repayment period, the bankrupt is discharged. Discharge is denied on creditor’s request. The creditor is entitled to make such a request when repayment is endangered, but the right is subject to a limitation period of one year after knowledge.
Furthermore, discharge is revocable by the court within 12 months on request when the debtor intentionally did not fulfil his obligations during the repayment period.

3. Main Problems
The Germany private insolvency scheme is positive in that it does not require a minimum payment to creditors and allows for zero plans.
However, this is about the only positive one can say about the scheme.
The court petition form is far too complicated, especially as filling it in incompletely or incorrectly can prevent discharge. It is still based very much on company insolvency and should be adapted to the needs of individual debtors by using a simple language.
As a result of the insolvency procedure, debtors are often refused full current account services. Existing accounts are closed by banks, regardless of the declaration of Germany banks in which they announced accounts without overdraft facilities would be provided to everyone. This declaration dates back to 1995 and was until recently not regarded as legally binding. In April 2003 however, the Landgericht (higher civil court) of Berlin held that the declaration grants a legally enforceable right.
Unfortunately, banks still do not comply with this, nor do they adhere to decision by the Ombudsman of the Germany Banks who held even earlier that banks do have to open accounts without overdraft facilities. Having an account is a must in everyday life and debtors are stigmatised on disclosing they do not have an account. This revelation makes it obvious to employers, landlords etc that one has debts. Besides, it is totally uncommon to receive wages or pay rent in cash. The declaration of the banks is insufficient since debtors still have to rely on courts or the ombudsman.
Debt counsellors do not receive sufficient funding by the federal states and are insufficiently equipped and staffed. Accordingly, the waiting list for licensed debt counsellors is between 3- 12 months, depending on the federal state. Often debtors visit the debt counsellor only once, hand in their documents and are notified when the out of court agreement has failed. They receive their documents and are supposed to fill in the court petition on their own. However, one has to keep in mind that incurring debts is often followed by passivity and resignation. The situation is regarded as hopeless. Thus, letters are not opened and documents not kept in order. It is not uncommon for debtors to take shopping bags of unopened and unsorted documents to the debt counsellor and expect them to sort it out. Arguably, licensed debt counsellors should involve debtors during the out of court procedure by letting them participate in the procedure and make them write to creditors under supervision. This would be an ideal chance to end their passivity and force them to examine their situation. As was explained earlier on, debtors are required to fulfil certain obligations during the court and repayment period. However, since most of them at that stage are quite passive, they are not prepared for the obligations to come. Debt counsellors simply do not have the time to deal with each debtor in an individual way and involve him or her in the procedure. Debtors often favour this anyway due to their passivity. They are quite happy to dump their documents -sorted or unsorted as the case may be- at the debt counsellors without getting involved.
Even though the out of court procedure is compulsory and has to be carried out by a licensed debt counsellor, the federal state Hesse has stop financing debt counsellors at the beginning of the year 2004 as part of the federal state government plan “Securing the future”. Cynical as it is, other federal states will follow. Bavaria has already announced this. Hessian and Bavarian politicians argue that lawyers could provide debt counselling. As was explained earlier, lawyers simply do not this because the payment is too low and besides, debtors cannot afford even these payments. It therefore remains a mystery, how debtors in these federal states are supposed to undergo the compulsory out of court procedure.
The aspect criticised most severely is the length of the procedure. Five or six years are too long for an insolvency scheme. Debtors are in most cases unable to endure living on the subsistence minimum for this period. Since the end is not within sight, they are unmotivated and do not have the stamina to get through with it. One also has to consider that the waiting time for the debt counsellor (3-10 months) and the out of court procedure (3-5 months) have to be added to the duration of the court procedure. Besides, discharge is revocable for one year and as courts usually defer payment of court fees, debtors have another four years to pay the fees. This adds up to more than ten years.
The Insolvency Act does not give reason for the duration. As one might expect, pressure groups of trade and banks successfully put in their foot as they have a vital interest of long repayment periods. Another aspect is cession of wages. Since creditors secured receive payment for two years while other creditors receive no payment at all during these years, unsecured creditors want their share of repayment. It was argued that the privilege of secured creditors was necessary, otherwise banks might not be willing to grant consumer credit in the future. However, since cession of wages is prohibited in countries like the USA and France, this argument is rather farfetched.
The duration of the repayment period should be shortened to a maximum of two years. This is a duration common in other countries and it would motivate debtors.
Nevertheless, one also has to acknowledge the way debtors are perceived in Germany society. This perception is closely linked to Germany etymology. In Germany, the expressions for “debtor” and “culprit” have the same roots. The Germany expression for debtor is “Schuldner”, while culprit is “Schuldige”. Arguably, debtors are by a large part of society regarded as people who neglected their affairs and are responsible for their own misery. This perception is also deeply entrenched in debtors. As a result, embarrassment and fear of gossip often deter them from taking necessary steps. Discharge is very often regarded as an unfair privilege of debtors. Discharge is by no means understood as giving debtors a fresh chance and a motivation to start again. Especially when debtors do not have any income at all and creditors accordingly receive no payment, it is very hard for creditors to accept discharge. This perception also partially explains why the Insolvency Act has adopted such a moralistic point of view. It does grant discharge, but only after the debtor has shown and proved honesty. Debtors who are dishonest will not receive discharge.
Licensed debt counsellors do encourage debtors to give interviews and tell their story in order to slowly overcome prejudice against debtors. However, acceptance could only efficiently be raised be larger campaigns and debt counsellors do not have the means to do so. As poor education and lack of legal and financial basics are one cause for over- indebtedness, debt counsellors should visit schools and youth organisations providing a basic education in these matters. However, with the federal states now retreating from funding debt counsellors, it is highly unlikely that over- indebtedness will recede in the future.