Deconstructing Debt And How To Handle It

“We could do a lot better with financial education in Iceland,” says Sara Jasonardóttir, project manager for education and promotion at the Office of Debtors’ Ombudsman (Umboðsmaður skuldara). Since its foundation in 2010, the Office has been assisting individuals who find themselves in financial difficulties, providing its services free of charge. We asked Sara what one should know about debt and when to seek help.

GV: What are the most common reasons people in Iceland end up in debt?

Most people who seek assistance from the Debtors’ Ombudsman have a variety of debts. People come to us when the banks can no longer assist them. In recent years, we have seen more and more consumer debt like payday loans. Expensive loans often snowball into a big problem. Sometimes, these loans have been taken to not default on other obligations. For example, people have lost income and had to compensate by taking loans to pay off housing debt or housing costs, and then it just piles up.

I don’t know if there is one reason for everyone. But usually, when people need help, they have lost control and are taking loans to pay loans. Sometimes, it’s because people have not had enough financial education that they don’t realise what they’re doing with money.

GV: Do you share your spouse’s debt?

In Iceland, your debts are your debts. They are connected to your kennitala if you don’t co-sign or put a joint property up for collateral.

There’s an exception when it comes to taxes. If you are jointly taxed or married, and your spouse does not pay certain public and municipal taxes, you are liable for it.

GV: What happens if you are blacklisted due to debt?

There is no blacklist; there is a default registry. If you default on a loan or payments, you go on the default registry and anyone you are seeking some loan from or want to rent an apartment from, for example, can look you up on that list. That’s the equivalent of a “blacklist,” but you can get off the list by making agreements and paying your debt.

The banks have their assessment of their customers, so if you have been in default with your bank or have been a poor payer, they will most likely have their record of you – staying on top and showing that you are a feasible customer is the way to go.

The default registry is handled by CreditInfo, a private company that sources information on people and calculates a credit score.

GV: What are the first steps to take if you are in debt?

The first big step is to face the situation and gain an overview of your finances – your income, living expenses and what is left after the basic household cost of living. If you don’t have the financial capacity to pay all of your debts on time, it might be necessary to prioritise them with top priority given to expenses related to the household: loan instalments (housing loans if you own the property you live in), property taxes, utilities, and/or rent. You could prioritise the others by paying the smallest claims first or making partial payments on the debts with the highest interest and expense.

When you realise that you won’t be able to make payments on time, it’s crucial to take immediate action because correcting the situation can become challenging and costly if your arrears start accumulating.

“If you see that you don’t have enough money to pay off your debt, seek some help.”

If your debt burden exceeds your income, negotiate immediately with your creditors.  For instance, check if it’s possible to negotiate deferred loan payments, pay only the interest on your loans, or modify the loan terms and conditions. For you to pay your debts on time, your expenses must be lower than your debt service capacity.

Under certain conditions, you can apply for a payment moratorium due to financial difficulties, such as through the Icelandic Student Loan Fund or the Housing Financing Fund.

Sometimes, figuring things out and getting things in perspective can be much easier with some help, whether from an expert or the people closest to you. If financial difficulties persist or default seems likely, you can seek advice and potential solutions by contacting the Office of the Debtors’ Ombudsman. After undergoing a financial distress assessment, you can receive assistance in negotiating with your creditors.

There are many possibilities through debt mitigation before people even think about filing for bankruptcy. We can even give financial aid to individuals who want to file for bankruptcy – you have to pay a 250,000 ISK insurance fee for the bankruptcy proceeding. Also, if you have payments that are way too much per month, but you still have some payment ability, let’s say you have 50,000 ISK to pay per month, but your loan payments are 150,000 ISK, we can assist you through mitigation to make an agreement to pay 40,000 or 50,000 ISK per month, and possibly have the remaining amount written off or completed over time.

The Office of the Debtors’ Ombudsman shouldn’t be the last resort. People feel ashamed and think they should have control over this. It’s not something that people speak about with others. People should approach us before they feel hopeless, but in reality, they often come too late. If you see that you don’t have enough money to pay off your debt, seek help. There is help out there, and we can help people find solutions.

Check out the Office of the Debtors’ Ombudsman’s website at ums.is for details on the assistance they provide