National Research Institute of Legal Policy

A Guarantee brings relief
Loans Guaranteed by the Guarantee Foundation during the Period 1991–2001

Helsinki 23 May 2002 

1 The Purpose of the Study and Research Material

The Guarantee Foundation was established in 1991 to assist persons with debt problems. Such assistance is accorded in the form of guarantees for bank loans. The application for a guarantee is prepared by a debt counselling service and a bank grants the loan. Through such a guaranteed loan a debtor’s previous loans, often consumer credits are paid off. In this way the debtor is left with merely one and often a more advantageous loan, instead of several expensive ones. The interest rate for guaranteed loans is at present less than 6 per cent, all costs included.

During the period 1991–2001, the Guarantee Foundation has granted guarantees to nearly 5,000 debtors to an amount exceeding EUR 60 million. In the year 2001, the number of guarantees accorded was just below 800, amounting to a sum of more than EUR 9 million. The Finnish Slot Machine Association provides the funds for these guarantees and supervises their use. The Guarantee Foundation mainly grants the guarantees through the Vera Insolvency Foundation, the most important fund administered by the Foundation. The guarantee may cover a loan of a maximum amount of EUR 37,000, and the loan period can be a maximum of eight years. Other forms of guarantees are so called basic guarantees aimed at persons that have been in institutional care and social credits (Solu) intended for minor purchases for persons with a low income and limited means. In addition to these guarantees, the Foundation offers its clients a telephone service free of charge.

This study evaluates the activities pertaining to guarantees, granted by the Guarantee Foundation. These guarantees have become an important alternative means of solving debt problems, complementing the legally based settlement of debts. The guaranteed loans also assist for example those who do not quality for a debt settlement by a court. This study conveys the experience of persons who have received assistance with their debt problems and also the experience of persons who have been successful in paying off their debts.

This study of the activities of the Guarantee Foundation is based on three data sets: The demand for the services of the Foundation (the so called debt-line) has been monitored and assessed through a questionnaire (n=352). Through data from the client register, a quantitative study was made of the guarantee activities of the Vera Insolvency Foundation during the years 1996 (n=591) and 2000 (n=787). Based on interview material, assembled among debtor clients (n=50), the profile of debt problems was investigated, as well as debtors’ personal experiences of the guarantee program and the activities of the Foundation.

2 Summary of the Results of the Study

Monitoring the debt-line. The debt-line of the Guarantee Foundation was solicited through close to 2,900 calls in 2001. During the two months monitoring period, a majority of the clients for this telephone service were debtors who for the first time contacted the Foundation. The debtors had generally been informed about the Guarantee Foundation by authorities, such as debt counsellors or debt enforcement authorities. To some extent, also authorities made use of this telephone service.

Four debtors out of five inquired the possibility of obtaining a guarantee for their loans from the Foundation. Also other information was sought. For example, debtors facing problems with the collection of their loan or recovery proceedings contacted the debt-line. Sometimes questions also concerned the settlement of debts.

It was estimated that the telephone counselling eventuated in a guarantee from the Foundation for only 40 per cent of the debtors. In other words, not all clients gained access to a guarantee from the Foundation, and they were often advised to seek other alternatives. The debtor was often advised to negotiate a rescheduling of his or her loan with the creditor.

Vera-guarantees in the client register. According to information drawn from the Foundation’s client register guarantees from the Vera Insolvency Foundation are mostly sought for consumer debts and for settling debt problems that have been caused by changes in a person’s life situation. In the late 1990s there was an increase in consumer debts as the cause of debt problems.

In 2000, the handling of an application for a guarantee took, on average, some four months, from the time an application had been submitted to the issuing of the decision. In 1996 the corresponding time was one month and a half. In addition, a debtor has to wait two to three months before his or her case is handled by the general debt counselling services. A guarantee was accorded to seven applicants out of ten in 2000, whereas in 1996, more than a four fifth of the applicants obtained a guarantee. An application can be rejected either if the person’s ability to pay is too weak or is too good.

In 2000, the applicants for a Vera guarantee had on average eight separate loans. In cases were a guarantee was granted, the average sum of the debts amounted to some EUR 14,000. Debtors whose applications were rejected, had somewhat bigger loans. Those debtors who obtained a guarantee had on average own property of merely EUR 2,500. During the latter part of the 1990s, both the amount of the loans and property had diminished in size.

The calculation of a debtor’s ability to pay is based on the Debt Adjustment Act. The part of the income that exceeds indispensable expenses has to be used to pay the loans. The ability to pay, thus calculated, averaged in 2000 some EUR 260 a month. This sum is bigger in cases where a guarantee was granted than for rejected applications.

In applications that were accepted, a guarantee has been sought for loans averaging EUR 11,300. The guaranteed sum decreased during the latter part of the 1990s. In applications that have been rejected, the amount of the guarantee applied for was bigger than in the accepted applications. In 2000 there were hardly any applications that exceeded the maximum amount stipulated in the conditions for the guarantee.

In 2000, an average of EUR 10,800 was granted, covering 91 per cent of the loans of the applicants. In more than four cases out of ten, the guarantee covered all loans. The average term of payment was five and a half year. In more than a fifth of the cases loans were granted for a maximum period of eight years. During the years 1996–2000 the loan period was shortened with an average of one year.

Among the guaranteed loans granted in 1996 there had, by summer 2001, been defaults in payment in 40 per cent of the cases. During that same period, changes had been made to the loan agreements in just above half the cases. During the first five years, one third of the payment programmes were carried out without neither defaults nor changes.

Among the guaranteed loans granted in 1996, somewhat more than one fourth had come to an end and three out of four were still kept up in summer 2001. Every fifth debtor had paid off his or her loan. Six per cent of the guarantees had failed, at least in part, and some part of it had to be paid by the Foundation. Among the cases that had come to an end, three out of four ended successfully.

In cases where debtors had failed to pay the guarantee, they had had more loans, a larger amount of debts and a weaker ability to pay than those who had managed to pay back their guaranteed loan. In addition, their guaranteed loans were bigger, the guarantee covered a major part of the loans and the payment term for the guarantee was longer than for those who succeeded in paying back their loan.

In the classifications used, such as age and family status, the guarantees had been most successful among couples without children, families with children, those owning their own hosing, and pensioners and unemployed persons. In these groups a maximum of one guarantee out of eight failed. In contrast to this, at least one third of those who failed, were persons aged 35–44, single parents and single persons. Persons holding a job have had a weaker success in managing their guaranteed loans than persons outside the labour market.

Interviews with clients. Those clients of the Guarantee Foundation that were interviewed mainly had consumer credits, before the guarantee was granted. Debt problems were often triggered by a sudden change in a person’s life situation. In hindsight, the problems were sometimes caused by too high a degree of risk-taking. Consumer credits were common and debtors also resorted to them in order to deal with accumulating problems. Outdrawn attempts were often made to settle debts through one’s own efforts. The loans of most debtors were already subject to debt enforcement proceedings.

Debtors ordinarily become clients of the Foundation through the debt counselling services. There were critical opinions about the treatment of the applications by the Guarantee Foundation. It was seen that the time it took for an application to be handled was too long and the procedure was conceived of as fairly bureaucratic. Persons whose application had been rejected were most critical. Many respondents expressed the view that the Guarantee Foundation should have offices also elsewhere than in Helsinki. This would make visits to the office easier.

When the respondents were asked, what kind of guarantee format they hade applied for, four out of five were not able to answer this question. At the time when a guarantee was applied for, the most important thing appeared to be to merely get a positive decision concerning a guarantee.

Those who had obtained a guarantee from the Foundation were in general satisfied with the conditions of the guarantee. Those whose application had been rejected were more dissatisfied. One illustration of this is that it was seen as onerous that a person would have to sell one’s property before a guarantee be provided. Also the Foundation’s requirement that the applicant should be able to show that he or she, in one way or the other, will manage the payments, was often seen as difficult. Quests were also made for flexibility concerning the conditions of the guarantee and the determination of the ability to pay.

Those who had obtained a decision about a guarantee generally felt that the program for a guaranteed loan had brought a relief in their economic situation. It had brought clarity into the economic situation and the management of the debts. Many of them had managed to arrest the spiral of debt enforcement. On the whole, to pay the guaranteed loan has not been an easy exercise. Among the respondents, half of them considered that they had reasonable means whereas four out of ten considered that their economic situation was weak. According to the debtors, changes in the payment plans were often due to a limited ability to pay and also to unexpected expenses. One third of the debtors had received a living allowance during the loan period.

In most cases, where a payment plan had been interrupted or a change had been sought to it, there had been changes in the economic situation or in the family of the debtor during the time of the payment plan. The most general means of coping with the situation was to seek a change to the payment plan. Requests were expressed for greater flexibility and a more speedy treatment when applying for such changes. Many respondents would have preferred to deal directly with the bank about the rescheduling of the loan, without the permission of the Foundation.

Those debtors that had not been able to handle their loan, even after the payment plan had been rescheduled, had the most difficult life situation. In these instances the Guarantee Foundation paid the loan as guarantor and subsequently charged the sum either on a voluntary basis or through debt recovery proceedings. In most cases the debtors had been able to settle a new payment plan with the Foundation. In other cases the income of the debtor was so weak that to manage the debts was a hopeless matter.

Interviews were also made with persons whose applications for a guarantee had been rejected. Almost all of them were dissatisfied with the treatment of the application and the conditions for the guarantee. Occasionally the debtor was unclear about the grounds for the negative decision. Usually the application for a guarantee had been rejected because the applicant did not have enough ability to pay. After the negative decision the debts had ordinarily been arranged through other means, such as a personal guarantee. Part of the debtors did not have any alternative solutions in mind and it seemed obvious that this problematic situation would be prolonged.

3 Discussions and Proposals for Improvement

The main purpose of the Guarantee Foundation is to offer social guarantees, but the Foundation’s telephone service gives an extended picture of the needs of persons facing debt problems. When soliciting the telephone service clients usually ask for a guarantee from the Foundation, but a major part of them are not successful in obtaining one. Debtors who are not accorded a guarantee are normally advised about suitable ways of solving their problems. For this reason the nation-wide telephone service offered by the Foundation can be considered as an important form of support and counselling.

The guarantee offered by the Guarantee Foundation through its Vera Insolvency Foundation is an important alternative for persons with severe debt problems in the intersection between banks and courts. The Vera foundation for debt settlement serves persons with severe debt problems but moderate debts. Their problems are too extensive to be handled in a credit relationship and too light for a debt settlement through a court. Guarantees are mostly sought for consumer credits and for debt problems caused because of changes in a person’s life situation. A guarantee enhances the chances for a negotiated settlement in a difficult debt situation. It also alleviates the situation of those who do not quality for the legally regulated system for debt settlement.

Judged by the conditions for a guarantee, the activities of the Guarantee Foundation appear inflexible, but the social nature of these guarantees is revealed in other ways. In the activities of the Guarantee Foundation business and social aims combine. It is important for the Foundation to restrain credit losses. This aim has been enhanced through a tightening of the conditions for granting a guarantee during the years 1996–2000. The social nature of this activity is displayed when expensive credits are combined and paid back through a less expensive guaranteed loan. Programs can also be rescheduled, which is an advantage both for the Foundation and the debtor. The Foundation avoids losses and the debtor is able to handle his or her problem. In addition, creditors often renounce a part of what they are due, enabling thereby the debtors to pay a major part of their loans through the guaranteed loan.

From the applicants’ point of view, major disadvantages are the division of the guarantee activities into three different foundations and the long period for handling applications. Debtors get a confused picture of the Guarantee Foundation, as there are three different forms of guarantees. Clients are not ordinarily aware of what kind of guarantee they apply for. The activities of the Foundation could be clarified by combining these different forms of guarantees. On average, clients have to wait for a solution to their problems for half a year, when both the preparatory stage at a debt counselling service and the handling of an application at the Guarantee Foundation are considered. The Foundation can influence the duration of an application by making its procedures more flexible. The organisations residing behind the Foundation should consider whether the resources of the Foundation are proportionate to its volume of work.

There is an uneven regional distribution of the guarantees provided by the Guarantee Foundation. The Guarantee Foundation has one single office, located in Helsinki, and its activities involving guarantees principally serve persons living in the South of Finland. If there were regional offices, the activities would be closer to the clients. On the other hand, the Guarantee Foundation is today also served by the preparatory work done by the nation-wide services for debt counselling, when handling applications for guarantees. This being the case, the regional distribution of the Foundation’s clients mainly reveal differences in how the debt counselling services function in different parts of the country, and also the use banks make of the Foundation in solving debtors’ problems.

Up till now, clients have been fairly successful in paying their guarantees, although there have been frequent instances of payment defaults and payment plans have often had to be rescheduled. Among guaranteed loans that were granted in 1996 and paid off by 2001, three fourths were successful and one fourth failed, at least in part. There had been frequent difficulties with payments during the term of the program. There had also been frequent needs to change the payment plan for the loan. The economic situation of those who had failed to pay their guarantee had been more severe than for those that had been successful. Above all, middle aged persons, single persons and single parents had had difficulties in managing their guaranteed loans.

Those debtors that had managed their guaranteed loan considered that their economic situation had been clarified. To obtain a guaranteed loan had alleviated the life of many debtors. It brought along regularity both in the handling of the debts and in economic matters generally, and they felt they had the problems under control. As a result of the guaranteed loan, many clients had learnt to consume according to their means and they had assumed a cautious attitude towards taking a new loan. After the guaranteed loan had been paid off, more than half of the persons interviewed still had debts. Most debtors considered that they were better off after the guaranteed loan than during the duration of the payment program.

All in all, there appears to be a demand for the activities of the Guarantee Foundation. Through its activities it has been possible to improve the position of persons facing debt problems. A positive aspect from a debtor’s point of view is that the guarantees have helped thousands of persons out of difficult debt problems. Thanks to the guaranteed loan their economic position had generally been clarified. Among negative aspects can be mentioned the strict conditions for obtaining a guarantee, the unequal regional distribution of guarantees and a certain lack of flexibility and bureaucracy in the handling of the cases. Notwithstanding this, the guarantees provided by the Guarantee Foundation are today one of the most important systems for supporting the position of persons facing severe debt problems.