Debt relief is a lifeline
In the largest study to date of the effect of the Danish debt relief scheme, researchers from Aarhus BSS have shown that the scheme works, helping debt-ridden Danes get back on their feet.
Bottomless debt isn’t just a financial straitjacket. It can also be a mental prison that stifles people’s motivation to work more, or even to work at all. Debt can thus have huge costs for society as well as the individual.
In 1984, Danes with unmanageable debt were the first in Europe to be given the option of applying for debt relief, and by 2005, the legal system had processed about 50,000 applications.
For the first time, a new study by a research team at Aarhus BSS, Aarhus University has reviewed all of these debt relief cases to determine what difference the scheme has made in the lives of applicants granted debt relief as opposed to those whose applications were rejected. And the effect is strong, significant and long-term, the study shows.
Once you’ve been granted debt relief, you don’t fall back into the debt trap again
Associate professor Jonas Maibom, Department of Economics and Business Economics, Aarhus BSS, Aarhus University
Permanent effect
“We see a large increase in income as well as in assets, for example owning property, among those who are granted debt relief relative to those who aren’t. And this is an effect that lasts even 25 years later. It simply changes people’s lives in a positive way, and it’s a large, permanent change,” says Jonas Maibom, associate professor at the Department of Economics and Business Economics at Aarhus BSS. He is a co-author of the study, published in the Review of Economics and Statistics, together with PhD student Alexander Kjær Hilsløv from the Department of Economics and Business Economics, and Research Coordinator Gustaf Bruze from Karolinska Institutet in Sweden.
To reach this conclusion, the researchers hand-collected and reviewed about 151,000 records on debt relief published in the newspaper Statstidende stored on microfilm at the Royal Danish Library. The names and addresses of applicants for debt relief were linked first with the Danish CPR register and then with a variety of nationwide registers containing data on employment, income, assets and other measures.
Compared with applicants denied debt relief, applicants who were granted debt relief achieved:
- 26 percent increase in earned income
- 11.7 percent points greater probability of employment
- 25 percent points higher probability of home ownership
Preserving the incentive to work
About two-thirds of the increase in income among applicants who received debt relief can be explained by their higher rate of employment relative to applicants who did not. The research team interprets this as indicating that receiving debt relief preserves the incentive to join or remain on the labour market.
“And once you’ve been granted debt relief, you don’t fall back into the debt trap again,” says Maibom.
However, far from all applicants to the scheme are granted debt relief. Over half of all applications are denied after the first meeting at the local City Court. The court may decide to deny an application for a variety of reasons – for example, if the court finds that a debtor is capable of repaying the debt, if the debt is relatively new or taken on to finance excessive private consumption.
No prospect of repayment
The City Court only grants debt relief if it finds that the debtor has no prospects of ever being able to repay the debt. Factors the court takes into consideration include the size of the debt, how it was accumulated, how old it is and whether the debtor has tried to pay it down.
If the City Court decides to move forward with an application, an announcement is published in Statstidende, and a court trustee will be appointed - typically a lawyer - who drafts a debt relief plan based on information provided by the debtor. The plan is presented at a public hearing, after which the court decides whether to grant the applicant debt relief, which may involve repaying some percentage of the debt.
“Clearly, we cannot include the applicants who are denied after their first contact with the City Court. But in cases in which the City Court decides to consider an application, about 70-80 percent are granted debt relief, and about 20-30 percent are not. It’s in the comparison between these two groups that we find a large and significant effect,” Maibom explains. He also stresses that the study does not draw any conclusions about whether more - or fewer - debtors should be offered debt relief:
“What this study shows is that this scheme is a success story for the individuals who are granted debt relief.”
Part of a larger project
The study forms part of a larger project on the effects of debt relief funded by a DKK 6.2 million Sapere Aude grant from Independent Research Fund Denmark awarded to Maibom in 2023.
The preliminary results of the study indicate that debt relief also has clear effects on other aspects of recipients’ lives, including health and family life.
“Ultimately, it’s interesting to look at the overall socio-economic effect of the debt relief scheme. On one hand, of course we have creditors who lose what’s owed them, just as there can be costs for society. On the other hand, there are also some advantages to the scheme, including offering a kind of safety net or insurance coverage, and of course, increased tax revenue when over-indebted Danes go from unemployment to employment,” Maibom says.
Facts
We strive to comply with Universities Denmark’s principles for good research communication. For this reason, we provide the following information as a supplement to this article:
Type of study | Quantitative study. Causal analysis. |
| External partners | None |
| External funding | Independent Research Fund Denmark. PIREAU at AU |
| Conflict of interests | None |
| Other | No |
| Link to scientific article | The Long Run Effects of Individual Debt Relief |
| Contact information | Associate professor Jonas Maibom Mail: maibom@econ.au.dk Phone: +45 29 93 37 49 |