In Estonia, a debtor lives the good life

Photo: nrcc.org

Estonia is turning into a paradise for indebted private persons. It is mainly the «minnows» who toil to pay back debts over here, like those stupid enough to draw fast loans. Whoever owes a lot is sailing towards expiry of obligations or debt cancellation as allowed by law. 

«In my practice, only the few rare debtors work decently, get the average pay and are making payments to creditors,» admits bankruptcy trustee Martin Krupp.

Turns out, many are the schemes how to keep living the good life in Estonia without paying one’s debt. At the end of all machinations, there beckons the legal option to be debt-free in six years.  

A best-known recent case is related to former sole holder of OÜ Autorollo, Väino Pentus (60). This Monday, Postimees wrote that the man that very day celebrating his sixtieth birthday had paid back mere €93 to victims, in three years, of a claim of €819,000.

If report presented to court last year by Mr Pentus be believed, he works as a long-haul truck-driver in a small Estonian company Vot & Sun. While the average Estonian wage for such jobs is €1,500 a month, the man has agreed to toil for minimal pay.

According to sources acquainted to the court procedure, it’s a «legally-all-okay» scheme where Mr Pentus gets the rest of the pay as daily business trip allowances. The latter not being wages in eyes of law, but compensation of costs, it isn’t taxable and bailiffs have no way of arresting the money. Though Mr Pentus is paying creditors the 75 percent of what comes above minimum wages – as required – the sum is in the realm of the ridiculous.

Trustee for the Autorollo bankruptcy, Mr Krupp says the rule is for minimal-pay guys to be found in bankruptcy proceedings. Daily, the trustees are seeing how wages overnight are turned into zero or minimum pay to which claims of payment cannot be made. «This is a hole the debtors have discovered in bankruptcy proceedings, and the use of it is massive,» says Mr Krupp.

The option is led to a private bankruptcy boom in Estonia. While only in 2011 the nation’s average bankruptcy debtor was a company, now it is an assets-free private person. In 2010, for instance, courts received 304 applications for private person bankruptcy. Last year, the number stood at 704.

State grasps not the numbers

For those who owe a lot, private bankruptcy is such a sweet way out actually. Legalised in 2011, the debts cancellation procedure prescribes that if a debtor has at least three years tried to pay the debt back as he was able, the court may deliver him from what is outstanding. Mr Krupp says this is now massively used by prisoners on minimal wages – in hopes of walking into freedom one day, debt-free.

As debts are reckoned separately by every domain, the state actually lacks an overview on how numerous are the debt schemers. The nation’s undisputed record debtors are listed in tax and Custom Board (MTA) registers.

According to MTA incomes department office head Airi Jansen-Uueda, the top 20 of the leading private debtors tend to be former board members who operated in retail and wholesale, production or construction. These people have not merely failed in business, but have been caught at peculating assets or generating tax arrears wherefore claims have been directed towards the board members personally.

«Taken separately, their debts begin at €300,000 and the largest claim to a private person is €26m. The sums are very large; all in all, the leading 20 private debtors owe €50.4m, €17.7m of which has been contested,» said Ms Uueda.

Since 2007, MTA has processed a total of 480 people with debts adding up to €61m. This year, the agency has retrieved a bit over €1m.

«Regrettably, the situation in Estonia is such that for individuals, hiding their income is relatively easy. We are seeing that even with very large debts the living standard of the people does not drop. They are still in the same comfort zone and their unmarried partners and family members are facilitating this,» describes Ms Jansen-Uueda.

The process of debt cancellation is underway regarding 400 people, approximately. Experience shows only half end up with the debt cancelled. With others, it is discovered during the procedure that the board member was not actually paying back the debt as was agreed.

To get an idea of methods used to shirk the obligations, I contacted a person who tested such schemes. Let’s call him Martin.

Martin said all schemes in Estonia work thanks to the fact that, pursuant to law, it is not the wage earner but tax official who must prove evidence of his revenue. The officials and bailiffs investigating the matter, however, have no sufficient right to intervene. As compared to Western-Europe, Estonian employers are much more agreeable to help with schemes.

«To prove that the one on minimal wages gets income someplace else is extremely difficult pursuant to Estonian law,» explains Martin. «MTA must do this, but they cannot simply say that we think you are living without income. This is only possible with surveillance, but for that the state lacks resource.»

In essence, with every debtor the bailiff only monitors the database i.e. bank account and changes in registered assets.

«My experience shows that a bailiff’s work is limited to realising registered assets. From there, as a rule, he gets his fee, and that’s the end of his interest. Only a few have gone as far as coming into the home and confiscating things,» he says.

Bankruptcy proceedings get postponed

The toothlessness of the state in retrieving money is expressly evident in the former Cultural Endowment head Avo Viiol (57) case. Having caused the state €544,879 of damage in his time, the man currently lives in Jõhvi, Ida-Viru County, and works in OÜ Viru Äriteenindus owned by himself, a company offering training and legal advice. He pays himself no salary, and withdraws dividends.

To at least get something back of Mr Viiol’s debt, Cultural Endowment and the bailiff are allowing the man to keep doing the business upon agreement that he pays about €500 a year to cover the debt. The 2013 report says Mr Viiol withdrew a total of €8,191 of dividends i.e. about €680 a month. Meanwhile, the company has accumulated nearly €30,000 of retained profits. Mr Viiol’s obligations expire by April 5th 2021. By today, he has paid back €4,777.

«Well he could actually apply methods to not pay at all. Our leverage is fragile,» admits Cultural Endowment head Olavi Laido. True: the state might apply forced sales to Mr Viiol’s share of the company, but the chances of getting anything out of it are weak.

As admitted by all parties that talked to me, the situation developed mainly has two causes to it. As in Estonia the notion of bankruptcy has been very badly defined, lion’s share of bankruptcy proceedings are initiated too late. At the same, time, once achieving private person’s bankruptcy, it is extremely easy for an individual to enter debt cancellation procedure.

Justice minister Urmas Reinsalu (IRL) said the state is not standing idly by. «Such scheming is not acceptable, a line needs to be drawn in the sand. We are planning to make execution proceeding more effective, to get the debts from the debtors,» he promised.

One way is to equip bailiffs with rights to assess a debtor’s income according to his actual contribution, not the wages paid to him. Thereby, a debtor or his employee could be enforced to still pay the money kept back by scheming.

Mr Krupp the trustee, however, says it would take measures even more drastic. Such as depriving people under debt cancellation from the right to fix themselves a minimal-pay-job. Instead of that, unemployment insurance fund (the Töötukassa) could be trustee for the debtors. If would see that the debtors work at their appointed jobs, earn accordingly, and are paying back the debt.