~ Reasons for debt problems

 

Reasons for debt problems

 

Within the international literature there are five broad explanatory approaches to explain why some people have debt problems while others, sometimes in apparently similar circumstances, do not. These are: demography; income levels; life events; over-commitment and money management skills; and structural factors (such as the lending practices of credit firms and the role of government). There is no clear consensus in the literature about the relative importance of these factors, but most surveys acknowledge correlations between debt problems and demography (especially young age) and economic profile. Households that are most at risk include those that have low incomes, have few financial and human assets, are tenants rather than homeowners, consist of non-partnered individuals and where there are dependent children: in short, the people who are most likely to be living in deprived circumstances. The extent to which problem debtors are the victims of life events, or else are facing difficulties caused by poor money management skills, is not clear from the literature. Factors such as gambling, alcoholism or drug addition as causes of over-indebtedness are barely considered in the mainstream debt literature.

Impacts of debt problems

 

Research on the impacts of debt problems is also limited. It is especially difficult to separate out the impacts of debt from those of low income and poverty. However, within the literature four broad categories of the impact of debt are described: financial hardship; poor health (physical and mental); family stress, stigma and social exclusion; and barriers to employment. Being over-indebted obviously has financial implications in terms of the ability to make ends meet, but it also appears to have negative impacts on (especially mental) health, and may be linked to suicide. For some it is a “dark cloud” that blights their lives and can have a major impact on their family relationships, although others seem to cope with their situations far better. Being over-indebted can also reduce the financial advantages of returning to work and may act as a barrier to employment. Finally, some individuals may take debt avoidance strategies - such as living in over-crowded cheap housing to reduce expenditure, or partaking in crime or other socially undesirable behaviour - which may also have negative outcomes (eg, on health and education).

Approaches to tackling debt

 

The literature study identifies six preventive policies that have been adopted or considered by other countries: legislation and/or guidelines for the consumer credit industry; improving access to affordable credit; improved policies for private companies (such as credit and utility companies); education and financial literacy strategies; money advice services; and managing debts to government. A seventh approach, the role of asset-based welfare, may also have potential long-term benefits. An eighth approach – which, surprisingly, is little discussed in the international literature – is to raise income levels for low earners and beneficiaries. From a policy perspective there is a balance between, on the one hand, protecting individuals and their families from undue stress and from unscrupulous lending, and on the other, stifling competition and the ability of individuals to borrow money.

Managing debts to government

 

Given the potentially negative social outcomes caused by over-indebtedness and financial exclusion, there is scope for government to review its own policies and practices in regard to debts owed to the Crown. Within the New Zealand literature there is some discussion on the role of Courts and on the recent increases in the number of unpaid infringement penalties reaching the Courts. There is also discussion of the role of emergency government loans to low-income families. Finally, there is some literature from the UK about the possibilities of improving the co-ordination of government debt establishment and collection policies. In particular, there may be possibilities for centralising government collection and the management of monies owed to it. Such approaches would require very careful planning.

Information gaps

 

There is an absence of robust data on household debt problems in New Zealand. Further research could involve direct, dedicated surveys of people with debt problems, although in the absence of these, further quantitative data mining of the HSS, the Household Economic Survey and the 2000 LSS (and the 2004 LSS and the Survey of Family, Income and Employment) would add to the knowledge base. There is a need for further specialist, specific research and analysis on debts owed to the state; for example, Court-imposed fines and infringement penalties, tax debts (to the Inland Revenue Department), hardship loans (to the Department of Work and Income) and housing arrears (to Housing New Zealand Corporation). There is also a need for qualitative data to find out about the impact of debt problems and the views of the governmental and non-governmental agencies that are most engaged with this issue. Finally, there is a need for research on the non-status and alternative lending industries (that specialise in lending money to low income people), and on the debt establishment and collection policies and practices of utility companies.