A Quick Look at Consumerism

This paper will investigate the role of insolvency in a growing consumer credit world and look at the role of bankruptcy, insolvency and consumer financial assistance to help consumers with money problems.

There can be no doubt about the spread and power of consumerism in our modern world. Beginning with the explosive growth in consumer buying activity in the U.S. following WWII, consumerism has become a modern value to purchase material goods or services that we believe that we want or need that help to make us feel better and improve our lives.  That time period also marked a cultural shift of early adopting countries of consumer debt from an attitude of save to spend to a new generational attitude of spend now before you can save for it.

We also now know that a reasonably substantial level of consumer debt is a positive influence to any countries economy and that the role of solutions to remedy bad debt also serves as a catalyst for a strong economy. If consumers are aware that fair solutions exist they are more likely to take on more credit and fuel the economic engine.

There is an entire encyclopaedia that could be written about the consumer need to spend, the use of behavioural economics and spending pathology in creating increased consumption, the emotional impact and benefits of the consumption of material goods, the role of marketing for creating need and the underlying issues which lead people to get into financial trouble. Because those issues clearly exist there is not going to be any examination of those issues here.

Consumerism is like a genie once let loose from the bottle that you can’t put back. No amount of protest or indignation is going to return any consumer, free market, growing or capitalist economy back to a time of perceived economic prudence and restraint. Today with the globalisation of advertising and culture, the invisible seeds of consumerism have been and are being broadcast to every corner of the earth, and beyond if ET is watching. And those seeds sprout into fully functioning consumers which drive the modern economies with full consumptive performance.

Free market economies are not to blame for the spread of consumerism. It is much like the early iron age when one person had thicker stone walls and a better thatched roof than the next person and people longed for that better perceived structure. People will naturally be attracted towards luxury and convenience over pain and suffering.

Since the dawn of time man has always been drawn towards those things which provide pleasure, the perception of pleasure or the illusion that having something will bring more happiness. Hedonism is a basic human trait that is so engrained in the psyche of man that no amount of education or punishment is going to beat it out of the masses.

There is no doubt that modern consumerism is fuelled and accelerated by credit and easy access to money. As with anything else in life, credit is yet another commodity, like food or drugs that can be easily abused and over indulged in that can lead to dire situations.

Many suggest simple solutions to combat the consumption of credit and proclaim that society will be better off with increased financial education or loads of regulation to control lenders. While those efforts might have some marginal effects, it would be foolish to think that those measures alone would going to slow the spread of consumerism in any meaningful way.

As long as there is a profit to be made fuelling the basic human want of consumption there will be a lender and a merchant striving to fill that need. Even in the farthest reaches of every continent a lender can be found or a credit card easily accepted to use borrowed money to fuel a purchase. If you have travelled behind the mountains of the poorest sections of the Appalachia’s in America or down a dusty road in the back of Botswana you will find lenders waiting to assist people with the extension of credit. You will also find new generations that are now educated to shop and almost always in pursuit of entitled luxury. This need for things has even reached so far into many cultures that birth rates are declining in some countries due to the need of couples to both work to afford current lifestyles.

Consumerism does serve a needed role in our modern energetic economies based on the production and consumption of disposable items, acquisition of items of high status, perceived value or brand needs. Without the purchasing power of the consumer the economies of countless countries around the world would be significantly harmed and even the powerful economies of countries like the United States would collapse.

The By-Product of Consumerism

The natural by-product of an energized economic engine is going to be some amount of waste. In a consumer based society, one form of consumer waste will be people that find themselves in the difficult situation of not being able to pay their bills. It’s just the residue that remains from a properly functioning engine. Think of it as the carbon burned into the walls of your cars engine or the ashes of a powerful steam engine.

When people do find themselves in a financial situation where they are not able to pay their bills or meet expenses, almost every single cultural treats that person as if they have behaved badly. Part of this treatment seems to be a need to punish the lot in an attempt to reach the few that have been feckless.

Unless the underlying situation of over-indebtedness is addressed the result will be a growing group of  individual consumers and their families which will lead lives of social exclusion. Additionally, unless the debt situation is addressed it can leave the family in a situation of putting basic needs at risk and create a serious psychological strain on the parents and especially children of financially strained families.

Debtors come in all shapes and sizes. From the creditor world a view I often hear is that debtors that can’t pay their bills as agreed are liars, cheats and thieves. From the other side of the valley I can honestly say in that all my many years of working with debtors in financial trouble that the vast majority feel shame and want to repay their creditors in a fair, reasonable and sustainable way. Ironically debtors are thwarted in doing so by creditor policies and procedures that clearly discourage repayment in a way that will allow the debtor to address their overall situation. Instead creditors take a “me first” approach that selfishly attempts to reclaim their portion of debt from the consumer. But such unilateral attacks only force the consumer to surrender, rather than to work diligently over a period of time to meet their debt to the best of their ability.

As far back as 1697 it was observed that people with financial problems fell into different categories. Daniel Defoe, the author of Robinson Crusoe, who himself went bankrupt, wrote in his work An Essay Upon Projects:

In order to state the Case right, there are four Sorts of People to be consider’d in this Discourse; and the true Case is how to Distinguish them.

(1) There is the Honest Debtor, who fails by visible Necessity, Losses, Sickness, Decay of Trade or the like.

(2) The Knavish, Designing, or Idle, Extravagant Debtor, who fails because either he has run out his Estate in Excesses, or on purpose to cheat and abuse his Creditors.

(3) There is the moderate Creditor, who seeks but his own, but will omit no lawful Means to gain it, and yet will hear reasonable and just Arguments and Proposals.

(4) There is the Rigorous Severe Creditor, that values not whether the Debtor be Honest Man or Knave, Able, or Unable; but will have his Debt, whether it be to be had or no; without Mercy, without Compassion, full of Ill Language, Passion, and Revenge.

How to make a Law to suit all these, is the Case. That a necessary favour might be shown to the first, in Pity and Compassion to the Unfortunate, in Consideration of Casualty and Poverty, which no man is exempt from the danger of. That a due Rigor and Restraint be laid upon the second, that Villany and Knavery might not be engourag’d by Law. That a due Care be taken of the third, that men’s Estates may, as far as can be, secur’d to the. And due limits set to the last, that no man may have an unlimited Power over his Fellow-Subjects, to the Ruin of both Life and Estate.

When people live through the inability to pay their bills, they feel shame and shock at not being able to meet their promises to repay and continue to care for their family. Whether it is a deep feeling of failure, the public fall from status, or the lack of good solutions to save these individuals and families, bad things can and do happen when bills can’t be paid.

In societies where there is no process for helping people to workout fair, reasonable and sustainable solutions to their financial problems, it is not unusual to read stories about debtor suicide or the murder of the family due to the inability to cope with a situation that needs professional intervention but yet creates such internal shame and feelings of failure. It is currently estimated that 30 farmers a day in India commit suicide as a way to deal with their financial difficulties because they can see no other way out.

Information outlets continue to pronounce that the reason for these large increases in insolvent consumers is due to the lack of values or the belief that there no longer exists a social stigma against failure. The reality is that nothing could be further from the truth.

In all of the countries I have studied, consumers do not seek failure or pain. They do not seek to be part of that perceived marginalized portion of society that is thought of to be undesirable and less than worthy. The reality is that financial failure often occurs, like a thief in the night, sneaking into a home that you thought was secure and safe.

In foresight the need for more financial education seems obvious and in hindsight the ability to dissect the events which lead to the failure of individuals is helpful and insightful but neither approach actually provides a helping hand or compassionate assistance to those individuals or families living through the failure of their finances at the time of crisis.

People find themselves in financial trouble for a number of reasons; some are through the easy overextension of credit, the lack of good management of their finances or just for some unforeseen and unexpected event. As an example, one client that came to me was a grandmother that was driving down the motorway with her young granddaughter in a child seat in the back. A driver suddenly swerved towards her and in a maternal moment she moved left to avoid being struck, only to hit a log in the grass beside the road. She and her precious granddaughter survived the accident but she broke her back and was left with bills and the inability to work. Before long her savings were used up to meet routine expenses and she faced the loss of her home.  Her son and his wife had been living with her while he looked for employment. The company he had worked for had recently closed and he was unexpectedly out of a job. So who’s fault is it that?

While I would like to say that situations like that are rare and far between, they are not. Bad debt, for whatever reason, happens to tens of thousands of good people around the world on a daily basis. Unfortunately the story above did not have a happy ending. Because she was unable to get her creditors to agree to a temporary repayment approach she could afford, she lost her home to the bank. As a result, her son and his family were left homeless and the grandmother struggled with her feelings of failure and in physical pain in an attempt to recover her life.

We must understand that wherever credit grows and is available, so does debt that can’t be repaid. They are both wed in a relationship that might change slightly but they can never be divorced, they will always exist together.

What is a shame and tragedy is that those that extend credit today are often large corporations with frontline policies and procedures that do more to force consumers into solutions like bankruptcy, where they seek protection and discharge their legal responsibilities to repay their debts through a judicial process. The approach by national and multi-national creditors to consumers who are unable to meet their contractual obligations to repay their debts is ill conceived and certainly much less profitable than could be achieved through better means.

People that are facing a financial set back deserve to be able to be treated with compassion, respect and professionalism. They deserve to not be thought of a powerless victim’s but as people that need an experienced guide to help them trough a difficult transition.

Consumers need access to fair, reasonable and sustainable solutions that will allow them to have an opportunity to repay what they can afford of their debts through an extra-judicial process in such a way that it allows the person to be enthusiastic about moving forward with their life, motivated to repay and does not just casually discard them as inferior people.

People also need access to a fair and efficient insolvency process that allows a court to hear cases, that will never be repaid through reasonable and fair payments, within a realistic period of time. In many countries this is either nonexistent or becoming corrupted through undue influence from the collections arm of creditors. People will always need to have access to bankruptcy and insolvency proceeding because they serve some very valuable functions in society.

Bankruptcy law is an inexpensive micro-organism for the free market economy. It serves to break down and catalyze what remains after a financial failure, bring the productive parts back to life, and discarding the rest. Think about it like this, if the market economy was a jungle; bankruptcy law simply helps clear the jungle floor of the cast offs that are no longer able to survive.

Bankruptcy is a healthy process that allows people in unreasonable situations to find a way to put their past financial misfortune or mistakes behind them and move forward when a fair repayment strategy can’t be reached. Bankruptcy also serves as a form of social insurance, allowing people to shed debts in order to take care of basic needs of food, shelter, clothing, etc. Without bankruptcy the burden of caring for individuals while they repaid their debts would fall on the government and our tax contributions. Bankruptcy also serves as a way to rehabilitate consumers back to their consumptive role as quickly as possible to help drive the economy forward.

Bankruptcy also helps to fuel the economic engine by creating an extreme safety net to protect people when they fall into difficult financial times. The knowledge that an ultimate solution exists helps people to feel better about consuming and thus helps the free market economies of this world to move forward.

As illogical as it might sound, the reality is that in the vast majority of countries, consumers are not given a fair, reasonable and sustainable path to repay their debts without bankruptcy. As I mentioned before, the front line policies of creditors is not flexible enough nor treat consumers as individuals to allow them to repay the maximum amount they can realistically afford to.

In the United States and elsewhere there exists a network of Consumer Credit Counselling groups that purport to be impartial consumer advocates to assist people in financial trouble but in fact they are compensated by creditors for collecting funds from consumers and returning them to creditors. Repayment plans are not negotiated or developed for the individual. The repayment terms are dictated by the creditors and if the Consumer Credit Counselling group does not honour those terms then the funding from creditors to fund the credit counselling groups can be negatively impacted or removed.

The social role of Consumer Credit Counselling groups is misleading. In their current model they pretend to provide a social service function but are tightly controlled by the creditors and thus do not operate as an impartial third party. They do not create impartial and individually negotiated repayment plans for the people they serve and do not stand up to defend consumers against the status quo.

Recent bankruptcy reforms in the US to force more debtors into chapter 13 repayment plans has shown little increase in payments to creditors. Instead, it leads to higher administrative costs, increases the already abysmal failure rate of Chapter 13 plans and further decreases the public confidence in the bankruptcy process.

Other countries like the United Kingdom, Australia and Canada have a non-judicial process that allows for professional intervention to create a fair, reasonable and sustainable repayment plan that will permit the consumer to repay what they could afford, within five years, and at the end of five years the remain debt would be discharged.

Under this approach creditors do actually receive more back than they would in bankruptcy or through a credit counseling debt management programme. The consumer is allowed to move forward with their life and receive truly independent and impartial assistance.

But as I speak even this process is becoming less effective as creditors try to consume a larger piece of the repayment pie and effectively force the consumer into making repayment promises that they can’t afford and subsequently fail.

Consumers can always make informal repayment arrangements with their creditors but without independent and professional representation the consumer will often over promise and under deliver in proposed payments because they are acting in a reactionary mode rather than from one of experience and professional review.

Creditors on the other hand have a tendency to expect high levels of repayment and will push for an increased payments, which often results in the failure of the plan.

The irony is that if creditors allow the consumer to seek and receive professional guidance and repayment plans they would receive a higher rate of return on debt repayment from delinquent consumers.

When you look at the completion rate of extra-judicial approaches as compared to informal debt arrangements the results are staggering. Formal debt arrangements like an Individual Voluntary Arrangement (IVA) in the UK have about a 85% completion rate while informal debt management plans have about an 85% failure rate, never making it to completion.

Results in the UK demonstrate that those consumers that enter extra-judicial binding repayment programmes return 36% of the debt to creditors while consumers that enter informal debt management programmes often return only 19% of the original debt.

In the EU, the mix of insolvency approaches still only results in an average outcome to creditors of 15% of outstanding debt, and in reality, much less when you consider the cost of designing the plan and administrating repayments.

We can argue for months on end about the cause and effect of problem debt. Many will say that it is the creditors fault for overextending the consumer, or the consumers fault for taking on too much credit. But by the time that a consumer’s financial situation becomes unsustainable, the reasons why someone has found themselves in financial trouble are only academic.

The role of the bankruptcy services in countries that allow active consumer credit should be first to encourage realistic repayment solutions to meet obligations without putting a burden on the court system. The judicial process should be reserved for those people that need to avail themselves of bankruptcy or need professional intervention to deal with unreasonable and unfair repayment proposals.
 
In a perfect system the courts would serve as a binding third-party that could help to resolve disputes with court recognised repayment proposal originators and creditors so that the issues could be resolved without the consumers need to go bankrupt but in an environment that avoided the uncertainty of non-binding and informal debt management programmes.

At the point of crisis the focus should be on developing a solution that helps people resolve their money troubles outside of the court in a fair, equitable, and sustainable way for all parties.

The Need for and Role of Professional Debt Mediators

There is a needed role that is missed in many countries, the role of the professional debt mediator. This role can be filled by insolvency practitioners, lawyers and recognised professionals by the local insolvency regulators.

Professional debt advisors do not attempt to manipulate the system, they attempt to serve to develop extra-judicial repayment arrangements that are fair, equitable and sustainable.

The best extra-judicial arrangement is one that contains the following features:

Customised – There is never a one sized fits all solution for financial problems. A one-size-fits-all solution will never serve the needs of any party involved. In that light any solution developed must treat the consumer as an individual and not be discarded by creditors on the basis of arbitrary thresholds or blanket criteria.

Fair and Equitable – Extra-judicial repayment proposals should recognise the need for the creditors to be repaid and the desire of the consumer to repay what they can afford to without bankruptcy. These repayment proposals should recognise that the consumer has an obligation to repay their debt but at the same time, at a level which is realistic.

Sustainable – Repayment arrangements should not reflect the arbitrariness of artificial thresholds established. They should be forwarded only if it is reasonable to expect that the payments agreed will be able to be made for the life of the repayment plan. A common problem is either debtors over-promising monthly payments, out of fear or an attempt to please, or that are so oppressive that they cannot realistically afford to make those payments, or creditors requiring a monthly payment that is so high that it dooms the debtor to failure.

Binding – The repayment plan should be binding on both parties so there is a clear written understanding of the terms and conditions agreed. This help to prevent any arbitrary change in terms at some point in the future that would sabotage the repayment plan.

Flexible – Any strategy or proposal to repay should allow some amount of variation or flexibility. All parties need to understand that life is not an absolute event and that unexpected events and changes do and will occur. This should allow for creditors to capture a portion of increases in income and provide understanding and solutions to provide for modifications to the plan when the debtors circumstances change.

Reward – The repayment plan should allow for some amount of reward to help keep the consumer moving forward towards maximum repayment. Some suggestions might include a waiver of the December payment if all others have been made on time to allow the debtor to better weather the holiday season or allow for a small amount of cash back at the end of the plan to help keep the debtor motivated to meet the entire repayment agreement.

We need to continue to recognise that debtors are often enticed to take out the credit in the first place in an effort to seek a reward and make their lives better in some way. It makes perfect sense to offer the same sort of reward based approach when encouraging consumers to get out of debt as well.

Efficient – Repayment proposals need to be easy to understand and not so complex that the process of the proposal becomes so complicated that it increases the overall cost of putting the repayment proposal forward.

Reasonable Cost – Professional debt advisors need to be appropriately compensated for their efforts. Unless they receive fair compensation than the field will not attract or retain people of skill and intellect that would probably seek professions in other fields. It is with the attraction and inclusion of these people that the cost of these repayment systems will decline through experience and the use of technology which these professionals will invest in.

Cessation of Collection Efforts – In the United States nearly 6 out of 10 people state that they pursued bankruptcy as a means to discharge their debt primarily as the result of collection activity. When people go to a third party debt advisor they should be given a reasonable grace period to work with that independent advisor to put forward a debt repayment proposal without undue pressure and fear from some creditors. This reprieve should be limited in time and frequency to be fair to both parties. Creditors should also cease all collection efforts during the term of the mutually agreed repayment proposal so as not to chase an otherwise compliant debtor into an unnecessary bankruptcy.

Open to All – Debtors should not have to pay large sums to enter a debt repayment arrangement. The cost of the plan should be paid from the assets of the debtors contributed funds so that the debt advisor is initially compensated for the time consuming and expensive initial process of developing a fair, reasonable and sustainable repayment offer and the investigation of the debtor’s situation. Remaining compensation can come from a percentage of payments made by the debtor to the plan trustee.

Transparent – Both debtors and creditors need to be able to have equal access to the process of creating a repayment debt proposal so the needs of both parties can be heard and that both parties feel comfortable that the repayment strategy put forward by the independent debt advisor is fairly balanced.

If we can work towards creating better and more efficient systems that allow consumers to repay their debt in a fair, reasonable and sustainable fashion then it will create higher returns for creditors, provide a healthier approach for consumers in financial trouble and allow the courts to focus on delivering judicial insolvency, through bankruptcy, in an efficient and cost effective manner to reduce the burden on the courts.

Currently the numbers of bankruptcy filers is less than 6 out of every 1,000 eligible people on a yearly basis. Unless we can further the extra judicial solutions in such a way as to make them more accessible to consumers, provide benefits for participation and increase returns for creditors, then bankruptcy rates will continue to increase higher and higher.