Responsible credit alternatives

Despite the positive effects of the Centrale des crédits, there still remains a group of people who need access to credit but are refused as they are too risky or not profitable enough.

In 2003, in order to provide appropriate access to small loans for those who need credit in an emergency, the association Credal Plus developed a microcredit pilot in partnership with the Walloon region and the Postal bank. Founded by the Walloon region, Credal was responsible for the assessment of the borrower’s request and for the support (personalised advice, budget education, financial information, etc.) during the repayment period, while the Postal bank granted the loan. However, due to administrative difficulties, the partnership with the Postal bank ended in 2007. Since 2008, Credal has been lending directly to borrowers while the Dexia Foundation is providing funds to the association.

These microcredit loans are for people who cannot access appropriate consumer credit but whose needs are useful and necessary. Furthermore they cannot earn more than the limit related to their social situation (number of people in the households, rent cost, etc.). The amount of these microcredits varies from €€500 to €€10,000 with an interest rate of 5% (including the administrative

costs).

The methodology is very similar to that of the social microcredit projects in France:

• An educational approach is developed along with a detailed budgeting plan.

• Solutions to solve possible financial difficulties are explored.

• An adaptable debt recovery method is provided.

The pilot is considered a success as it has met the needs of its borrowers. Moreover, despite the fact that these loans are granted to

“risky” people, very few have faced repayment difficulties (5.04% between 2003 and 2008) or have been lost (0.4% between 2003 and 2008). This emphasises that appropriate lending practices can significantly reduce the level of risk of these borrowers. However, the Credal’s pilot remains limited as only 529 microloans were granted between 2003 and 2009 (Credal, 2009).

The mainstreaming of these microloans is the key challenge for the pilot to really achieve its target. Such a goal is not unrealistic considering that the Monts de piété(municipal pawnborkers) grant 120,000 loans per year and a large part of them are provided to the target group of microcredit.

3.5.3 Dealing with financial difficulties and overindebtedness in an efficient way

The Belgian strategy addresses financial difficulties through regulation as well as direct intervention.

3.5.3.1 Managing arrears

Similar to other countries, when a borrower presents with financial difficulties, Belgian credit providers have to try and come to some agreement with the borrower. However, if these difficulties remain unsolved, the recovery of debt is highly regulated in order to avoid potentially inappropriate practices from creditors, or from companies who intervene on their behalf.

In 2003 a law was introduced which clearly defines the procedures around debt recovery. It forbids:

• all intimidating practices (e.g. false information regarding the consequences of non-payment, use of documents copying the style of official or legal documents, etc.); • measures which exploit the debtors (e.g. making them pay

illegal fees);

• harassment (i.e. phone calls and visits are forbidden between 10pm and 8am and the debtor is free to refuse or stop the visit).

The law also requires that debt recovery respects the confidentiality of the procedure. It is forbidden to make explicit on correspondence that the enclosed material is related to debt recovery procedures, or to contact people known to the debtor (family, relatives, neigh -

bourhood, work colleagues, etc.). All debt recovery companies have to be registered and cannot charge debtors for their action (only creditors have to pay for their services).

The law also requires that the debtor receives a letter outlining the reason for the debt recovery and the procedure that will follow. Once the letter is sent, no action can be taken during the following 15 days. This period is supposed to give the debtor time to find a solution. In this situation – but also in every debt situation – the debtor can be assisted by debt counsellors.

In 1991 another law created debt mediation providers. These registered public or private entities help debtors find solution to their indebtedness problems. They can:

• act as an intermediary between the debtor and his/her creditor(s);

• negotiate repayment extensions or interest reductions; • elaborate a repayment plan;

• initiate a collective debt settlement procedure.

The main providers of debt mediation services are Public Social Action Centres (CPAS) which exist in every municipality. Debt mediation is not their core activity as they also provide social welfare and deal with the financial and social difficulties of social welfare recipients. Similar to other public entities registered as debt mediators, they do not charge fees for their services. Conversely, private debt mediators such as lawyers can be costly.

In 2007 debt mediation was extended to cover all types of debt. Hitherto it was exclusively dedicated to consumer credit arrears. Debt mediators can now deal with the global financial situation of the debtor, which makes their action more effective. However, they are only mediators: they cannot constrain creditors to accept a repayment plan or to modify their expectations. If no agreement can be reached, even with the support of debt mediators, the next step is

the règlement collectif de dettes (collective debt settlement procedure).

3.5.3.2 Remedial measures for overindebtedness

The collective debt settlement procedure is similar to that in France. The judicial procedure is only seen as a “last resort” if the non- judicial procedure has failed.

Figure 28: Number of collective debt settlements registered in the Centrale des crédits aux particuliers

Source:BNB, 2010

In order to begin a collective debt settlement procedure, the debtor has to submit an application of “good faith” to the court, which is either accepted or rejected. Then the court will designate a debt mediator who will oversee the procedure to reach an agreement as well as its implementation. The mediator may be the one who has previously helped the debtor to assess his/her situation and tried to help him/her find a solution.

The costs of debt mediators who charge a fee are regulated by law, their bills are validated by the judge and the fee can be taken into account by the “overindebtedness treatment fund” when debtors’ solvency is too low (the fund intervenes mainly when partial or total write-off of the debt occurs).

This fund is funded by creditors in relation to their level of involvement in the collective debt settlement procedure and their credit market share. This mechanism is supposed to motivate creditors to adopt more responsible lending practices. However, no evaluation of it has been carried out.

When the application has been accepted, the amicable phase of the procedure begins. There is no legal definition of the characteristics of the debt settlement except that it has to preserve a

disposable income necessary for a decent life. Apart from this requirement, the stakeholders are free to agree on any measure they consider appropriate (e.g. rescheduling of the debt, reduction of interest due, etc.) as well as on the length of the new repayment plan. The only condition is that all stakeholders agree to it. When this agreement is obtained, the judge validates the plan agreed.

Creditors have to give precise explanations if they refuse the plan that is submitted to the judge. If the judge considers these explana - tions invalid, the amicable plan is implemented. Similarly, if the negotiation lasts for more than two periods of 6 months, the amicable phase is interrupted and the plan becomes the responsibility of the judge.

When an agreement is not reached, the judge designs a repay - ment plan which is compulsory for all stakeholders. Contrary to an amicable one, the judicial plan is regulated by law and it cannot extend beyond 5 years.

Similar to the amicable process, the judge can reschedule the debt, reduce the interest rate, suppress fees and constrain the debtor to attend budgetary guidance or any other social supports that seem appropriate.

If it appears that the income of the debtor is too low, the judge can implement a partial or total write-off of the debt. In the case of a partial write-off, the plan cannot be shorter than 3 years or longer than 5 years and what is not reimbursed is written-off. A total write- off involves the selling of all the debtor’s belongings except those considered necessary for a decent life. The bankruptcy is considered as definitive after 5 years. During these 5 years, if the situation of the debtor significantly improves a repayment plan is set up.

3.5.4 Strengths and weaknesses of the Belgian strategy to