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Corona is likely to drive more people into over-indebtedness

A.Even if the number of overindebted people in Germany has fallen again in recent months – the credit reporting agency Creditreform is drawing a rather gloomy scenario for the next few years due to the corona pandemic. “The long-term prospects for the development of over-indebtedness are worrying,” warned Creditreform expert Patrik-Ludwig Hantzsch. Short-time working and growing unemployment figures currently mean that many consumers in Germany have less money available. This is what the credit agency reports in its “Debtor Atlas 2020”. The state aid measures have mitigated the worst social effects and an increased propensity to save and greater reluctance to consume have ensured that a nationwide liquidity bottleneck has not yet materialized. Private consumption, for example, has fallen by 11.7 percent in nominal terms and the savings rate has risen to more than 20 percent.

However, around 700,000 people have now lost their jobs and up to 7.3 million people have had to go on short-time work and many freelancers were fighting for their livelihood. In addition, the number of freelancers and self-employed people who are fighting for their livelihood and are on the verge of over-indebtedness is estimated at two million. In the second quarter, the price-adjusted decline in earnings was 4.7 percent – the strongest decrease since the survey began in 2007. The “lockdown light” in November exacerbated the problem.

On balance, however, the current trend in over-indebtedness reads unspectacular. The number of over-indebted consumers in Germany fell slightly for the third time in a row and, at 6.85 million people, is back at the level of 2016. The proportion of over-indebted people in relation to all adults in Germany also fell slightly to 9 .87 percent, which is the lowest level since 2013. For the first time in four years, the rate is below the 10 percent mark. The figures reflect the robust state of the labor market up to spring.

This positive trend reversed by April at the latest, according to Creditreform, which expects a staggered increase in over-indebtedness cases. The consequences of the pandemic are more serious than those of the global financial crisis twelve years ago, the long-term prospects are worrying, especially since the pandemic will also cause further polarization. The lower social classes have only very small financial reserves and a ‘negative savings rate’ and are therefore indebted and over-indebted. There were already signs of financial overloads that would lead to an increase in over-indebtedness cases with a delay. In addition, one expects a catch-up effect in the consumer insolvency proceedings, because the good conduct period for insolvent consumers has been shortened since October. That will lead to an additional increase in so-called hard over-indebtedness cases.

“Hard” cases are understood to be those with legally relevant issues. Their number fell again this year by almost 5 percent to 3.82 million. In 2006, however, there were only 3.4 million. On the other hand, the number of so-called soft cases has increased in recent years. However, it is well below the 2006 figure. The decline in severe over-indebtedness can largely be explained by the boom that has been going on since 2010. A similar decline was observed in 2008 as a result of the boom phase that began around 2005, which was then temporarily ended by the financial crisis. Creditreform estimates the current “dark figure” for all debt cases, which is currently not yet visible, at 400,000 people. If this number is followed, this corresponds to the 2007 level.

Creditreform also finds some individual trends questionable. In contrast to the trend, old-age over-indebtedness rose significantly again in 2020, and even more so than in previous years. For those over 50, the number rose by 245,000 or 11 percent, and in the over-70 age group by 23 percent. Since 2013, the number in this age group has more than quadrupled, while the number of over-indebted under-30s has fallen by 38 percent. Nevertheless, senior citizens are still significantly less likely to be over-indebted than younger consumers. The group of 30 to 39 year olds has the highest rate. Here it is more than one in six, among the over-70s less than one in thirty.

From an international perspective, however, Germany is currently obviously “lucky in misfortune”. The over-indebtedness of consumers in the United States and Great Britain is already significantly worse due to the different framework conditions, such as higher wealth inequality, since the social security systems did not compensate for the loss of income or only inadequately. In addition, a new real estate crisis may be brewing in America, as according to some information around 30 to 40 million people are at risk of eviction.

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