Lessons from Holland: Helping citizens with debt management pays off

As household’s struggle with rising levels of debt, should local government step in to help? Clare Cummings reports on a scheme in Holland in which state support for debt management is paying off.

Researchers in Utrecht have been exploring the financial benefits of providing public services for debt management. Unlike the UK where public funding for advice services is being dramatically cut, local governments in the Netherlands provide a range of debt support services and initiatives for citizens.

Since July 2012, local councils in the Netherlands have been legally responsible for debt counselling. This means that the council acts as an intermediary between the debtor and the creditor and tries to arrange an amicable debt settlement. The local councils also support the indebted individual through services such as budget coaching and ensuring stable housing. In extreme cases where the settlement fails, the debtor can appeal for a statutory debt settlement. If this is granted, the debtor has to live on 90% – 95% of the minimum welfare allowance for three years and then they are given a clean slate.

Rising debt levels
However, like the UK, the Netherlands is experiencing increasing numbers of people struggling to manage their debts as the economic recession continues. In the Netherlands, the number of people using municipal debt management services has almost tripled since 1999, the average amount of debt per person has doubled since 2000 and now around one third of Dutch households are in arrears on at least one payment.

The profile of people in debt is changing too. Traditionally, it has been lower income groups who end up with problematic debts, often people with a low level of education and people who depend on welfare benefit payments. But now, if you enter a debt counselling office, the picture is different. People with debt difficulties are increasingly young, elderly, home owners, self-employed or in reasonably well-paid employment.

Naturally, the cost of providing debt management advice to more and more people is increasing the costs for local governments at a time when they are trying to cut back on spending. Just like local governments in the UK, Dutch local authorities are grappling with decisions over which services to keep and which to cut and how this will affect their spending overall. To reduce costs, some councils are aiming to help people stabilise their debt, rather than supporting them until they are completely debt free, while others are limiting the frequency with which they help the same household.

To try to calculate the costs and savings to councils of providing debt support services, researchers from the University of Applied Science conducted a cost benefit analysis to assess the impact of the debt management services provided by five Dutch local authorities. The study concluded that, on average, the financial return on debt management is twice as high as the cost of providing the services. On average, the municipalities spend 1.4m euros per 100,000 residents on debt management, which resulted in savings of 3.3m in other service areas.

How does debt management help save costs?
Debt management services are particularly effective for making savings in social welfare and housing. The following table shows the average costs saved in numerous areas of public service provision:

Reduces unemployment: People who used debt management services were found to move off unemployment benefit support more quickly, which generated savings for the state. There were also benefits for people who used the services who were in employment. Debt management is estimated to help individuals stay in work who may have otherwise lost their jobs due to the stress of high personal debt or due to employers being unwilling to renew temporary contracts of indebted employees.

Helping housing providers: A second important saving is in social housing spending. 77% of the people using debt management services live in social housing and more than half of these people are behind on their rent payments. If tenants fail to pay the rent they owe, housing associations may carry out evictions. To prevent evictions, debt management services deliver crisis interventions which save the housing provider the cost of evicting tenants. Since housing providers benefit greatly from their tenants being supported to manage their debt, municipalities might look to partner with housing providers to co-finance debt management services.

Wider benefits: The analysis only focused on the most direct benefits of providing debt management services. In reality, enabling an individual to resolve their debt problems can have a variety of positive impacts on their life. Debt management is likely to generate additional benefits and savings for the police, the justice system, the healthcare system as well as decreasing absenteeism from training and employment and the costs to creditors of unresolved debt and debt collection. These factors are difficult to measure accurately and so were excluded from the study but if they had been included, the estimated savings from providing debt management services would clearly have been higher.

The findings of this research are unlikely to come as a surprise as providing early intervention services is proven time and again to be well worth the investment. What the research highlights is the need for political courage to continue to fund public services despite the risk of the media presenting them as ‘wasting hard-earned taxes on irresponsible citizens’. The UK could learn a lot from the debt management services provided by Dutch municipalities. With severe cuts to legal aid funding, escalating household debts and an ever growing presence of pay-day loan shops, the UK could look to the Netherlands to learn how to deliver cost-effective debt management services which generate savings for the state and huge benefits for individuals and society.

• This article is a summary of Debt management pays off! A research on the cost and benefits of debt management in the Netherlands by Prof. Nadja Jungmann, Prof. Roeland van Geuns and Marc Anderson. You can download a copy here.