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The number of collection cases decreased during the coronavirus, but don’t be fooled: the worst is yet to come.
Credit management company Lindorff held a digital press seminar on Friday, where debt economist Morten Trasti gave an update on debt and default developments based on the latest Lindorff data.
And Trasti said at the seminar that the number of collection cases dropped in April decreased by almost 10 percent in April compared to the corresponding month last year. April was the first full month in which the Norwegian company closure took effect.
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Take care of yourself in autumn and winter
– The number of collection cases has actually decreased, but we believe that this will change considerably as the months go by. The effects will be stronger during the fall and winter. And this time, most indications indicate that it will be a fairly strong increase from what we saw during the financial crisis, Trasti said.
In other words, there are clear delays due to problems in an economy that occur until this results in default and debt collection. After the financial crisis just over ten years ago, collection cases peaked eleven months after the crisis began.
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“We expect something similar to happen this time,” said Trasti, who warns against worse development than in 2009 and 2010.
– The reason for this is that the fall in production and the increase in unemployment are much higher now, and that the debt is higher, the debt economist warned.
On average it takes approx. 45 days from an invoice due to a debt collection case is established in Lindorff. In some counties, it takes 100 days to file failed claims, so it can take 55 to 270 days for a collection case. Therefore, there is great reason to believe that the worst awaits us.
cautious
– The public sector has been very careful in sending new cases. We also see trends for retail to send fewer cases. It can be seen in the context of weak demand for many goods, Trasti said.
And although there are fewer people in arrears, the default amount increases.
– The outstanding balance of the debt increased somewhat in both March and April. This means that the average outstanding amount continues to increase with us, which is really part of the long-term trend, Trasti said.
– You have more unsecured credit when you first reach debt collection.
The average outstanding debt in Lindorff has almost doubled from approx. NOK 10,000 in 2014 to around NOK 20,000 this spring (see chart below). Therefore, the fall height is higher for debtors than a few years ago.
Three risk factors
In particular, Lindorff sees three risk factors ahead. One is that household debt levels are now much higher than they were ten years ago, after the financial crisis. Here we stand out from other countries, which have reduced their debt.
Until the crown situation, there was solid growth in unsecured credit. The unfortunate thing is that after closing, it is more difficult to obtain credit for those who need it.
– Risk factor number three is that those with the lowest incomes are the most affected by infection control measures. On the one hand, income high enough to get credit, but on the other hand it is so low that there are small margins and little else to do on the income and expense side before going into debt collection, Trasti said.
Interestingly, they are the ones with the lowest incomes, even before the greatest decline in income in the future.
Furthermore, unemployment is at a historically high level.
Non transitory
– And although unemployment has decreased a little, it is not close enough for this to be a transitory phenomenon. Paid work is by far the largest source of household income, and now that income is declining, it is obvious to believe that default will increase, the debt economist said.
In industries such as tourism and transportation, almost one in four unemployed, while the wage level in these industries is lower than average. This makes them more vulnerable to default.
– Those who already have small margins have even smaller margins. What contributes a little in the positive direction is that interest rates are now reduced to zero. But for those who have many unsecured loans, how much the interest rate will be on that type of credit is limited, Trasti said.
The positive is that there is a decrease in the number of collection cases among the youngest under the age of 30, but this is a trend that Trasti does not necessarily believe will last. And the long-term trend of further growth in the number of debt collection cases for those over 60 continued in April.
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