A middle-class man or woman with a net income between CZK 18,000 and 20,000 – banks are willing to lend money to these people but they are then often unable to pay off their debts. That is a typical example of personal bankruptcy in the Czech Republic.
Since the law on filing for personal bankruptcy came into force one year ago, more than 2,000 Czechs have asked for their debts to be cancelled. And there will be more of them.
According to the Justice Ministry’s statistics available to Aktuálně.cz, a total of 2,382 people have asked for the cancellation of their debts. 638 personal bankruptcies have been declared, another 1,713 have been approved by the courts. Twenty-one requests for debt cancellation have been rejected.
Nothing for the poor
According to “field” experts, the so-called insolvency law proved itself; however, it also has its imperfections. For example, people with low incomes often cannot take advantage of it.
The speed with which the low-income groups run into debts in the Czech Republic is very high. A request for debt cancellation is also very complicated and consultancies charge large sums of money for its processing. Personal bankruptcy can also be abused under certain circumstances.
Calculations? Steady
“The number of filed requests for the so-called personal bankruptcy was constant for the past year,” Zuzana Steinerová, the Justice Ministry spokeswoman told Aktuálně.cz. However, she does not want to speculate whether the number of requests is going to rise this year because of the economic slowdown and layoffs. Nevertheless, in general when the economy slows down, the number of bankruptcies also grows.
Andrea Běhálková from Olomouc’s civic organization SPES – help with debts, which provides consulting for people in financial stringency, is also careful about predicting future development. “The law has been very effective. However, we have a big problem with bureaucracy. There’s too much paper work involved and some consulting companies charge as much as CZK 10,000 for help,” the organization’s chairwoman says.
Expensive consulting
In Prague and Ostrava, for example the community organization Poradna při finanční tísni (Financial stringency consulting) provides free help. One of its advisory board members is Bohumil Havel, a former member of a group of experts who prepared the law. A typical bankrupt is a middle class person with a net income between CZK 18,000 and CZK 20,000, who is not able to pay off their obligations, Běhálková says.
Banks lend money to these people. On the other hand, people with low incomes come only rarely, the law is really not made for them,” Běhálková says. The incomes of poor people are not usually sufficient to cover the obligatory 30% of the due amount.
“People drawing full pension are sometimes successful, but those on maternity leave or on reduced pension are not,” the expert says. These people often do not reach for bank loans and borrow money from credit companies for high interest. With more loans they are only “robbing Peter to pay Paul” and find themselves in a debt trap.
Běhálková says there are many ways for people circumvent law or abuse it. “Some clients tell me that since they are obliged to pay off only 30% of their debt, they will borrow some more money before they file for bankruptcy. Or if someone has such a big income that they could pay off for example 70% of their debt, they say that in such a case bankruptcy isn’t advantageous for them,” she says.
She thinks that the law should be therefore amended. She wants to present her comments to the Government Legislative Council soon. “In Germany there is an insolvency law also for the unemployed. It would be good if an amendment took into account also the low-income clients,” Běhálková says.
Some critics do not like the fact that banks can find out if a person has been in the insolvency registers of bankrupts in the past. Even several years after the debt is cancelled the person concerned could have a problem acquiring a loan for example.
Personal bankruptcies are common in the western European countries as well as in the United States, but laws differ in details. For example in Germany, the amount of instalments is dependent on the debtor’s income, which motivates more people to cancel their debts, the portal Peníze.cz says.
