The German consumer bankruptcy law and moral hazard – the case of indebted immigrants
| Pages | 161-181 |
| DOI | https://doi.org/10.1108/JFRC-04-2018-0064 |
| Date | 18 June 2019 |
| Published date | 18 June 2019 |
| Author | Mevliyar Er |
| Subject Matter | Financial compliance/regulation,Financial risk/company failure |
The German consumer
bankruptcy law and moral hazard –
thecaseofindebtedimmigrants
Mevliyar Er
Independent Researcher, Gelderland, SP, The Netherlands
Abstract
Purpose –The purpose of this paper is to investigate to what extent the increased insolvency filings by
migrants since the enactment of the consumer insolvency law in 1999 is associated with moral hazard. It
describes the profile of migrantdebtors and highlights the areas of moral hazard. This studyaims to propose
changesto the consumer bankruptcy system.
Design/methodology/approach –Empirical evidence for thiswork consists of primary data from 435
individuals mainly with immigration background, who were declared bankrupt by district courts
(Amtsgericht). Both qualitativeand quantitative research types were used. Interviews helped to attainan in-
depth understandingof the way in which any misconduct may take place.Quantitative data were gathered to
understand the debt profile of migrant debtors, types of liabilities and creditors’reactions to write-off
requests.
Findings –The paper provides empiricalinsights about the way misconduct is pursued and suggests that
neither party, i.e. the debtors through debt counsellors and creditors/factoring companies or their
representatives, is entirely free of unethical practice. Hence, the paper stresses the need to establish public
agencies,which provide joint mediation services for privatedebtors and their creditors alike.
Research limitations/implications –Data collected for the purpose of this study may not be
comprehensive becausegiven the sensitivity of the area of study that is misconduct –including breaking the
law –not all machinations may have been revealed and described in this work. Therefore,further research
needs to be conductedin this field.
Practical implications –The paper has implications for policymakers.Consumer bankruptcy system is
relatively new and needs to be amendedto allow debtors and creditors to negotiate write-offs not by sending
countless lettersthrough their respective representatives, which is also carried out overa long period of time,
but to try to come to termsin one agency, which is responsible for both sides.
Social implications –The findings in this paper may provide somevaluable insights, which could also
give impulsesto debates on problems that may come with immigration.
Originality/value –To the best of the author’s knowledge, no research exists that analyzes the topic at
hand with suchextensive data and using both methods of research at thesame time.
Keywords Debt counselling services, German personal bankruptcy law,
Indebtedness amongst migrants, Out-of-court settlement, Unemployed migrants
Paper type Research paper
Introduction
Personal bankruptcy law allows a debtor who is unable to repay the debts owed to file for
bankruptcy. Once payment difficulties are confirmed, the court ca n rule that a debtor
cannot currently repay any debts and may even allow debts to be written-off fully. Not
only the debtor benefits from this procedure but also the creditor gets a chance to get at
least some of the claims through a repayment procedure that is adjusted in accordance
with the change in earnings, if any, of the debtor. In many European countries by the end
of the twentieth century, it was for reasons of rising household debt that prompted the
The German
consumer
bankruptcy
law
161
Received14 April 2018
Revised31 July 2018
4November 2018
Accepted13 November 2018
Journalof Financial Regulation
andCompliance
Vol.28 No. 2, 2020
pp. 161-181
© Emerald Publishing Limited
1358-1988
DOI 10.1108/JFRC-04-2018-0064
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1358-1988.htm
enactment of the personal bankruptcy law. In line with these developments, the German
Insolvency Regulation (Insolvenzordnung abbreviated as InsO) on company failures
(regular insolvency proceedings) has begun in 1999 to incorporate personal bankruptcy
(consumer insolvency proceedings), as depending on corporate status, business
insolvency may also lead to personal bankruptcy.
Evidence from German debt counsellors accumulated to date shows that the number of
persons seeking advice at debt counselling services is increasing. While in 1999, 16,263
people sought debt-related advice at debt consulting services in Berlin, this numbersoared
to 45,788 in 2009 (Landesarbeitsgemeinschaft Schuldner und Insolvenzberatung Berlin
(LSIB) e.V, 2009). The data from Berlin further show that while the number of native
German clients slightly decreased between 2004 and 2008 from 87.4 to 85.3 per cent, the
number of non-EU clients increasedfrom 8.1 to 10.2 per cent. In 2016, the number of persons
seeking debt-related advice soared to 617,237 nationwide (Destatis, 2017). Among these,
511,375 had German citizenship,about 37,268 were from other EU countries and those from
other countries 68,148.In percentage terms almost 83 per cent were German nationals,6 per
cent were from the EU countriesand 11 per cent from other countries.
The household savings rate in Germanyis one of the highest among the Organisation for
Economic Co-operation and Development(OECD) countries: it fluctuates between 16 and 18
per cent and varies the least when compared with other OECD countries. Although
Germany is the most prosperous member of the EU, the country is, in relative terms, not
poverty free. This is all the more the case for migrants living in the country: while the rate
for those without migrationbackground increased from 11.7 per cent in 2010to 12.1 per cent
in 2016, poverty rates for migrants increased from 26.2 to 28.1 per cent during the same
period (Seils and Höhne, 2017). These figures are affected by the recent wave of refugees
from Syria and Iraq: 81.9 per cent of Syrians and 70.2 per cent of Iraqis are living below the
poverty line. Nevertheless, the presence of poverty among legally residing migrants is not
without significance: in 2016, 28.2 per cent of children born to migrants were affected by
poverty compared to 13.3 per cent of ethnic German children (Seils and Höhne, 2017).
Furthermore, poverty seems to affect older migrants more than the population without a
migrant background(in 2016, 32 per cent vis-à-vis 12.7 per cent).
There is no doubt that such externalities in the industrialnations are inextricably linked
to higher migrant unemployment. A micro-census survey for the year 2009 in Germany
confirmed that migrants were affected by unemployment twice as much as the population
without a migration background(BAMF, 2011). The affected were, in particular, young men
and elder migrants, as well as individuals with Russian,Turkish and Serbian backgrounds.
Furthermore, the share of long-term unemployment was much higher amongst migrants.
Economic assimilation of migrants seems to be particularly difficult, as yet, another study
shows that migrants who have been residing in Germany for a longer period of time, were
facing a much higher risk of unemployment, that they have poor prospect of finding a
permanent job and that they weretaking up jobs way below their qualifications (Höhne and
Schulze-Buschoff, 2015;OECD,2010, p. 53). Among the causal factors for such discrepancy
specific to Germany is not only non-recognition of foreign degrees and qualifications but
also “unconscious bias”by the employers against migrants (Höhne and Schulze-Buschoff,
2015).
The problems of economic assimilation are compounded by sectoral exclusion, as
migrants in Germany are likely to work in physically strenuous jobs. Aforementioned
survey results indicate thatmigrants have more salaried employment in catering andin the
primary sector than ethnic Germans born in Germany. The majority of migrants, and in
particular, men (from Turkey, Serbia and Spätaussiedler –i.e. immigrants with German
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