With the long-waited establishment of a new government and the easing of the worst of the lockdown measures, one issue that is already pushed to the sidelines is the psychological cost of recession – even as we are still looking at the prospects of a deep economic downturn in the eye.
The many ministers and deputy ministers in the new government would do well to consider the mental state of the one million or so Israelis who are unemployed. Many of them are going to be struggling with debts and not a few will end up filing for personal bankruptcy. Many will struggle to get permanently out of debt.
A study released by the Enforcement and Collection Authority, the arm of the government responsible for enforcing court orders for repossession and other financial affairs, confirms this: The main impact of its operations on people is emotional. Many fail to climb out of debt permanently.
The survey, which was conducted among people who had received court protection from creditors due to bankruptcy since 2016, found that the biggest relief they felt when they finally exited bankruptcy was psychological (25% of the respondents).
Recovering from bankruptcy isn’t an easy process. In the United States, research has found that it takes an average of 10 years for a person exiting bankruptcy to return to his or her previous standard of living. The reason is that they are in effect starting their economic life over in terms of assets. They struggle to get bank loans and their ability to find work declines. It’s no surprise that the effect of bankruptcy takes a higher emotional toll than bankruptcy itself.
The authority’s study focused on so-called debtors of limited means, a legal category created in 1994 to help those with limited financial resources to stretch out repayments for longer periods than the law would ordinarily allow. The aim was to give them time to settle their obligations and enable them to return to a normal life.
But it didn’t work. By 2014, there were 80,000 people designated as having limited means who hadn’t succeeded in repaying their debts. The fact was that the monthly amounts they were obliged to pay didn’t even cover the interest portion of their debt, so that the amounts they owed kept growing.
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The next year, the government decided something had to be done and issued a special temporary order that would exempt them from their debts if the authority, after a thorough examination, approved it. In practice, only a small percentage of qualified debtors applied for the exemption. The survey found that many didn’t even know the option existed.
Among the 1,521 debtors who did get an exemption in the years 2016-2018, a small number (just over 5%) still failed to right their financial position, amassed unpayable debt and were back in court. The researchers, led by Rivka Aharoni and Rafi Golan, interviewed 60 of them.
The survey revealed several characteristics of debtors who were unable to climb out of debt even after they had received an exemption from past debts.
Some were obvious. Among those who found themselves back under the supervision of the authority, tended to have more children (48% of those with four or more children versus 10% for those with just one child). Those aged 55 or over were also more likely to get entangled in debt again as were those with less than 12 years of education and who weren’t working or searching for a job.
Among the most frequently cited reasons for being unable to repay debt were health (38%), lack of employment (20%), personal or family crisis (20%) and bad financial management (16%). Interestingly only a quarter of the debtors owed money to a bank, apparently because they couldn’t qualify for a loan to begin with and ended up in many cases borrowing from relatives.
The upshot of all these number is that the Israelis in the most severe financial straits struggle even in normal times to climb out of debt. The coronavirus recession we are entering will magnify its effects – many, many more people will find themselves in the debt trap the survey revealed. More Israelis will file for bankruptcy and the odds that they will recover financially are poor.
Aharoni and Golan said their research shows the need to come up with new ways to address the problem of people who file for bankruptcy, receive exemption and fall back into debt again afterwards in two years or less.