Insolvency syndrome: when over-indebtedness affects health and well-being

The relationship between personal debt and mental and physical health is well documented. Yet despite data showing the magnitude and dramatic consequences of over-indebtedness on health and wellbeing across Europe, little has been  done to acknowledge and address the connections between over-indebtedness and health, and the ‘insolvency syndrome’ that, in the worst cases, can lead to untimely death and suicide. We propose joined-up medical and financial solutions to tackle what are often combined problems of health and indebtedness, together with a reversal of austerity and other conditions giving rise to indebtedness.

An intertwined medical and financial issue – Evidence from Sweden

According to the Swedish Consumer Agency, over-indebted people had levels of illness nine times higher than people not exposed to debt problems. This includes mental illnesses like clinical depression and anxiety, which are almost five times as high among over-indebted people. Over-indebted individuals develop emotion-focused coping mechanisms, feelings of inadequacy, decreased self-worth and hopelessness seven times more than the general population unaffected by over-indebtedness.

In the most extreme cases, over-indebtedness may lead  to suicide attempts and suicides, particularly among people registered with the Swedish Enforcement Authority (i.e. bailiff). In 2018, between 250 and 525 suicides were closely related to over-indebtedness out of a total of 1574 suicides in the Swedish population.

As we see it, these facts and figures represent the foundation of a syndrome that can reasonably be called the ‘Insolvency Syndrome’.

Being over-indebted influences both safety and health

Individuals’ well-being depends largely on safety and health. Safety is based on the fulfillment of psychological, physical, social and existential needs. These basic needs can be affected by individuals’ health, and vice versa. Consequently, safety and health are reciprocal, each being very important for the maintenance of personal dignity and well-being. It appears that a good lifestyle, home comfort, state support and debt advice services have a positive impact on physical health. When one or more of these variables fluctuate, for instance in the case of ‘critical life events’ such as unemployment, bankruptcy, illness, disability, divorce or loss of home and assets, people are exposed to greater risks in terms of health and mental conditions, particularly if they were already affected by over-indebtedness.

Groups including elderly people, migrants,  single and low income parents and those in poverty are particularly vulnerable to negative life events, and hence to the issues caused by over-indebtedness. In the case of low-income households with children for instance, taking on credit to pay for essentials may be the only option. Debt puts further pressure on household budgets, so children miss out on the basics anyway. In addition, if the debt issue remains unresolved, children and adolescents will be called on to pay once they reach the legal age to take on debt, in an intergenerational spiral of reproduced debt and fragility.

Another important but infrequently explored dynamic is how mental health problems might lead to debt, particularly within the current culture of debt dependency which has been actively encouraged through processes of financialisation. Either way, individuals find themselves trapped in a dead-end that exacerbates feelings of inadequacy and hopelessness which may induce depression or anxiety. Finally, it is worth pointing out that the specific malpractices of debt collection all across Europe may contribute to a worsening of these mental health issues and further aggravate the social stigma and marginalisation of heavily indebted individuals.

A combined approach to get out of the ‘insolvency syndrome’

The evidence provided above supports the case for the implementation of an EU standardised ‘care flow’ approach to examine the health of people affected by debt. This would include a combination of physical examination and psychiatric screening and treatment, based on the premise that care is a vital  relational and emotional constituent of health

Following this logic and wanting to raise public awareness of over-indebtedness as a societal problem, a group of researchers in the Department of Psychology – Lund University Hospital, staff members of the Psychiatric Clinic at Lund University Hospital and members of the National association of Swedish budget and debt advisers launched in 2019 “The National Competence Center – Insolvency Syndrome” (website under development).

Adapting the model developed by the Financial Therapy Association (FTA) and Personal Financial Planning Master’s Program at Kansas State University, USA, patients receive combined assistance from independent budget and debt advisors and from the Psychiatric Clinic of the Lund University Hospital. This two-fold assistance – funded by the social-welfare unit of municipalities nation-wide and free of charge – deals with the intertwined emotional, psychological, behavioral and relational hurdles these people face, while thoughtfully addressing their financial challenges.

A call for policy making

Given the large numbers of people affected, over-indebtedness should be considered a societal issue; and one that is directly connected with the ever-expanding credit-based society coupled with a parallel decrease of social and welfare spending, in which key social programmes have been cut at a time when constituents need them most.

The wide array of economic austerity and disciplinary measures introduced after the 2008 financial crisis (e.g. lowering of wages, longer working hours, increased food and housing costs, loss of pension rights and increased costs for students, etc.) have been, in many countries, linked to a shift from a welfare state to a ‘debtfare state’. Alarmingly the dismantling of the traditional welfare state has been ‘compensated’ by the (private) provision of fast and expensive credit such as pay-day loans. This enhanced credit provision is a double-edged sword for precarious people already affected by over-indebtedness and for those facing ‘critical life events’.

Policy makers should implement a two-fold approach to tackle the issue. In the short-term, they should urgently legislate on toxic loans to prevent people from falling into the debt trap, while also offering medical, psychiatric and financial therapy. In addition, introducing effective personal bankruptcy regimes and ‘second chance’ schemes for all EU citizens would provide an immediate relief to over-indebted individuals. Although some member states have implemented good practices such as the early detection of financial difficulties, EU harmonization is still missing and much needed.

To make such changes sustainable, bold political action is needed. Increased welfare and social spending across Europe would reduce dependence on private debt, and would allow access to financial therapy and critical financial literacy for all citizens. Initiatives such as the ‘The National Competence Center – Insolvency Syndrome’ mentioned above help by collecting evidence to argue for common EU rules and praxis to standardise multiprofessional interventions in support of indebted citizens.

The central goal of these proposed regulatory interventions should be the defence of individuals’ dignity and rights to membership of a fair and inclusive society. This in turn requires a holistic approach in our understanding of the impact over-indebtedness has on individuals in terms of their wider health and wellbeing.

Richard Ahlström and Fredrik Tjulander