Last ditch appeal to tackle flawed debt collection facing two million Czechs

Photo: Ladislav Bába

Debt collecting bailiffs are a factor in the lives of millions of Czechs. Many of them are in fact subject to multiple collection proceedings for fairly minor sums with the costly bureaucracy involved digging them deeper into the mire of debt. A last call has now gone out to politicians from two of the country’s most significant non-profit organisations to reform the current system.

David Ondráčka,  Daniel Hůle,  photo: Olga Vasinkevich
People in Need, which has helpers at the sharp end across the country dealing with debt, and good government and corruption combatting organisation Transparency International, teamed up to highlight the problem of the Czech Republic’s debt recovery system. And the scope of the problem is indeed massive as the leader of People In Need’s debt advisory service, Daniel Hůle, outlined.

ʺAt the moment in the Czech Republic, proceedings involving bailiffs are targeted at around 10 percent of the adult population. When we take into account husbands or wives, partners, and children, that means it affects around 20 percent of the adult population. The problem is very basic with creditors having no incentive to look at other alternatives to launching debt collection proceedings. Before that, many do not act responsibly when giving loans to people who are already in debt and who don’t have sufficient income. They are not accustomed to taking such things into consideration because they are used to the fact that under the existing system and at the end of the day they can seize everything. So there are no real obstacles when loans are offered and they don’t hesitate to call in the bailiffs. That leads to the situation where people are in a desperate situation. Many are handicapped when it comes to getting jobs and for many it does not even pay to seek work."

The current system was pushed through to deal with a chronic problem of debt repayment. But it looks like the scales have tipped far in the other direction now. Creditors are effectively in the driving seat and, it appears, are quick to launch debt collection proceedings for fairly small sums without any attempt at mediation to determine whether another solution might be possible.

ʺThe problem is very basic with creditors having no incentive to look at other alternatives to launching debt collection proceedings."

ʺThe average amounts in question come to several tens of thousands of crowns. However, when we look at the wider picture, around 50 percent proceedings involving bailiffs are for sums of less than 10,000 crowns. That is around a third of the average wage in the Czech Republic. These sort of amounts could be subject to some sort of arbitration or out of court settlement if the creditor was more motivated to proceed with such a path.ʺ

People in Need’s Hůle says there is still a massive problem of outstanding debts from the recent past twinned with a smaller, but still significant, ongoing problem.

ʺThere are two aspects to this. Compared with the past years there is an enormous difference between the number of proceedings which started in the past and those which have recently been launched. Today there is no longer the massive business surrounding fairly small debts that there was. But there are still four and a half million debt collection proceedings outstanding from the past which are not very easy to end because there is no longer much at stake for the creditor and very little gain and nothing for the bailiff to collect. From the perspective of new proceedings, we are in a lot better situation than we were two or three years ago. But the accumulated problems from the past is still significant and without any progress there we will still have an enormous number of people in an insoluble situation."

The joint presentation by the two NGOs was no wake up call to highlight a problem that has been in the shadows. The Czech debt collection system was already in the limelight ahead of lower house elections last time round in 2013 with a promise from the eventual winner, the Social Democrats, now the leading government party, to deal with the problem.

Photo: Ladislav Bába
But the impetus to fulfil that promise appears to have been lacking and another problem is emerging, the prospect of a cartel like situation with fewer and more powerful bailiffs’ offices, more distant from the debtors they are dealing with, but ever more closely linked to key decision makers and institutions. Head of the Czech branch of Transparency International, David Ondráčka, describes the situation.

"The current system of bailiffs was introduced in 2001, so it has been in action for 17 years. It was meant to improve the enforcement of the law and court decisions and to make sure that debts are being paid. That was the main principle and the main motive. However, after 17 years there are very serious defects in the system. We have 150 bailiffs in the country but they are highly disproportionate. So you have huge offices that have thousands and hundreds of thousands of cases and small offices that deal with hundreds or a few thousand cases. Unfortunately, the whole system tends to be monopolised or oligopolized so that there will be only a few bailiffs left. Our experience is that this leads to the fact that individual cases are dealt with without any scruples and very often the money that needs to be paid in the end is much higher than the original debt.ʺ

Ondráčka says the power of interest groups with a stake in the existing debt collection system is one of the main brakes on reform of a debt collection system which is flawed, has clearly failed,but continues to ruin many lives.

"It seems to us that the incentive is to simply play a game between large creditors and bailiffs and to go hand in hand and not to care about justice or any individual approach to those who should repay their debts. We are talking about two million Czechs who are involved here. We believe that this system has quite drastic social effects in many regions. There are a lot of cases which are clearly illegal or questionable and the incentives of the system leads to the fact that it is just a business to get more money for the creditors. It is all bound up in a very close patronage system between bailiffs, creditors, some law firms, and other agencies that deal with those issues."

"You have huge offices that have thousands and hundreds of thousands of cases and small offices that deal with hundreds or a few thousand cases.ʺ

The reform advocated by both organisations is a regional system of bailiffs appointed by courts called in to deal with debt problems, a so-called territorial system, with one bailiff tasked with handling all the debt issues of an individual debtor. That’s the system that has recently been introduced in Slovakia and will take effect from April 1 and where similar problems existed to those now in the Czech Republic.

One big advantage of such a simplified system would be that debtors would not be faced with multiple trips to bailiffs located all round the country to deal with their cases and those costs in time and money could be reduced. The organisations admit though that the costs of the big debt collection companies might increase marginally because they might have to deal with more regional offices. But the big organisations that are often the source of debt collection proceedings appear to have set their face against this reform. David Ondráčka:

ʺThe important creditors like banks, insurance companies, transportation companies, are huge and very powerful lobbyists and they want to keep the status quo at the moment because it’s very beneficial for them. So, they lobby the MPs and lobby the government and up till now they were able to slow down the process so that any proposal that reached parliament was parked and never discussed. That’s one reason. The second is that the Ministry of Justice, which is in charge of the whole system, takes very limited steps to improve the bailiff system. I guess they are afraid of dramatic changes, but it’s a striking difference from neighbouring countries like Poland and Slovakia, which introduced the territorial system recently and this was quite a courageous move. The Czech Ministry of Justice is idle, in my view, and is afraid of dramatic reform."

ʺThe important creditors like banks, insurance companies, transportation companies, are huge and very powerful lobbyists and they want to keep the status quo."

The appeal by People in Need and Transparency International seeks to exploit what is seen as a last window of opportunity to get legislation through the current parliament. If not, it could be back to square one again:

ʺI know we are approaching elections soon but there is still enough time to actually introduce such a dramatic change. All three readings in parliament can be managed within six months if there is political will to do so. The proposal is actually parked in parliament and should go into first reading in April at the latest. If not, it will fall down and be discussed in the new parliament and by the new government. So, it’s the last minute actually and that’s why we took the initiative and try to make it public and create certain pressure on the political class."