Credit can be used to finance education, a car and a place to live while we are young and enables us to enjoy the benefits while earning money to pay for them. Over the past century, a modern financial system has evolved that provides ample access to credit. A welldeveloped credit market is an important part of a well-functioning economy. There is another side of the coin: Once we have incurred a debt, it remains with us. The debt must be repaid – with interest. We might say that while credit is an unvarnished good, debt is a necessary evil. Paying for bread already eaten can be tough. When we borrow money, we draw up a repayment plan with the bank. Implicit in this plan are a number of expectations – regarding our future earnings, net worth and interest rates. If these expectations pan out, the plan succeeds. We arrive at the desired outcome. And many times, the future turns out even better than expected. In recent decades, house prices have risen and with them our wealth. Income growth in Norway has been high and has benefited nearly everyone. At the same time, interest rates have fallen to historically low levels. This has made a high debt burden easier to bear. In forming our expectations, we often look in the rear-view mirror. As anyone knows who has driven a car, mirrors are important. But if you only look back in the mirror, you will land in the ditch.
Speedy and efficient liquidation of insolvent companies is crucial for the economy’s overall ability to restructure, innovate and grow. This is closely related to creditor protection. Creditors enjoy high standing in Norwegian legislation. High creditor protection makes it relatively easy for creditors to demand liquidation when the conditions are met. As long as the legal system and administrators in bankruptcy function as intended, the creditors may realise their claims on the estate and resources are freed up for society. It is essential that resources – labour, skills and capital – that are tied up in an unprofitable business are freed up for new activities. This also provides adequate, if painful, adjustment in a crisis. The downturn is shortened, and the economy gets back on its feet faster. Household debt is harder to restructure. Norwegian households can settle debt by liquidating their assets, but this usually only takes place after the borrower dies.4 Before that, the rule is that debt follows you to your grave. Norway has a Debt Settlement Act. Very few would voluntarily petition to enter into a debt settlement arrangement. While some of the debt may be forgiven, such an arrangement involves garnishment of wages, down to the minimum for necessities. Many of those who enter into such an arrangement in Norway struggle with debts incurred while self-employed. Recent years have seen a sharp rise in consumer debt. Defaulting on this sort of debt is much more common than defaulting on a residential mortgage. Default does not mean that lenders forfeit their money.