When there is not enough money

The Finanzmuseum team exchanges ideas with Pascal Pfister online on a Thursday in July afternoon. It is not just any Thursday, but the day on which the latest statistics are published by the umbrella organization. In 2022, more than 5000 new households, i.e. people seeking advice, came to an institution affiliated with the umbrella organization Schuldenberatung Schweiz.

We got to know each other during Swiss Money Week 2023. We are both members of the Financial Literacy Network. Debt counselling is also concerned with prevention: This is intended to counteract the taboo on the subject of money and thus indebtedness.

Pascal Pfister, what does the debt situation in Switzerland look like in general ?

If you look at our statistics, more than 5000 households come to a consultation every year. The Federal Statistical Office speaks of eleven percent of the population with at least one form of pay rent arrears in 2021. A private economic figure calculates a debt ratio of six to seven percent (persons with debt enforcement proceedings from the request for continuation). These figures have remained relatively stable in recent years.

The current low unemployment tends to counteract debt, while inflation significantly increases the debt risk for households with low budgets. However, debt counseling is not the ideal predictor for the current situation. People usually don't get in touch with us until a few years after they get into debt.

Interestingly, contrary to expectations, no «corona effect » can be detected. However, the development of recent years shows that many self-employed people are now also affected by debt, despite federal aid. However, counselling is rarely covered by the service contracts between the debt counselling centres and the cantons and communes. Some specialist agencies have taken the first steps in advising this target group.

The Inkasso-companies (see glossary) and its professionalization has only emerged in recent decades. In the past, companies claimed payment arrears themselves, but today these processes are often outsourced to Inkasso-companies. 

Consumer loans continue to be an important topic in debt counselling: in times when liquidity is lacking, the economy can be kept «running» by granting consumer loans. However, if a consumer loan fails, then it is the case in Switzerland that the debtor is liable. For this reason, consumer loans are approved by politicians and the hurdles are relatively low. 

Should access to it be more restrictive?

The approach of debt counselling is that at the same time defaults would have to be socially accepted. At the same time, a Schuldenschnitt (see glossary) must be made possible.

Nowadays, subscription models are ubiquitous and their fees add up monthly. What are the implications?

The simpler accessibility of such subscription models can be overwhelming. There are advantages: Spreading the annual expenses over the month can be more difficult than paying steady monthly fees. Credit card payments, newer payment methods - such as Buy Now Pay Later - are other, additional channels of consumer credit, which of course can generate debt.

Who gets into debt in Switzerland?

People report to our specialist offices at the end of a debt. In this case, they have been affected by debt for a long time. These tend to be households with lower, insecure incomes. Previously foreseen events, such as a dentist's bill, can cause them difficulties. In general, it can be said that debt can affect everyone. Divorces, illnesses, unemployment, non-paying customers, etc. are so-called «critical life events» that can trigger debt.

It is interesting to note that it is precisely people who are in their «prime working and family age» who are most affected. At the same time, most of the costs are incurred in these life situations – children, homes, etc.

There is also the administrative or linguistic overload that can lead to indebtedness. Structural causes are also decisive. Of course, financial literacy would help here. Often it simply helps to create a budget: a small but crucial step. Knowing where to get help is also financial literacy; For example, when it comes to health insurance premium reductions, you need to know what and who can help you. It would be desirable if such basic skills were already taught in schools. 

Having debt is often the beginning of a downward spiral. Indebted people work to service their debts. Because interest is charged on debts, compound interest. Even in the case of personal bankruptcy (see glossary), the debts are not simply gone. It would therefore be desirable if there were a Schuldenschnitt (see glossary), i.e. a discharge of residual debt, as the Federal Council intends to propose to Parliament. The condition of access to the proposed procedure is that no new debts may be incurred during the four-year procedure. In addition, the opportunity for debt relief should only be allowed to be taken ‘once in a lifetime'.

21% of those seeking advice are under 30 years of age, many seek help independently of counselling centres, as you write in the report. What can you tell us about the debt situation of young people?

Broadly speaking, there are two types of reasons that put adolescents and young adults in debt: Those who grow up with an indebted home have difficult conditions. It can be compared to the poverty phenomenon, which is also hereditary. Specifically, the health insurance debts of the parents have been inherited so far. These became an unwanted 18^th birthday present. A start to the age of majority with a mountain of debt. From January 1 2024, the Health Insurance Act is to be revised and thus this inheritance is to be abolished.

In addition, there are adolescents or young adults with their own debts, which can have various reasons (see Fig. 27 in the statistics report). Separation/divorce is still underrepresented in this age range. Rather, moving out of the parental home and starting households is a reason. There are different family conditions, some can be supported by the parents, others not. Here, financial literacy would be an important concern before you become responsible for everything yourself.

Shopping addiction is also mentioned more among people under 30. Whether this is more likely to be attributed to young people due to age would have to be investigated in more detail. However, status symbols are even more important at this age.

Are young people advised differently?

Basically not, no. What distinguishes the cases of young people and young adults from others is the Schuldensanierung (see glossary). There is the possibility to count on the «goodwill» of your own family, to take over certain amounts. However, this is not a realistic possibility for everyone. On the part of creditors, on the other hand, the willingness to waive or withdraw amounts is lower. They tell themselves that young people still have the opportunity to repay the debt.

In the case of adolescents and young adults, the course must be set to prevent possible indebtedness. Financial education can help with this. Because, as we know today, it is many years of indebtedness, entire backpacks, that ultimately lead people to the last station, debt counseling.