Debt forgiveness is not a moral hazard
About 80,000 households are struggling with mortgage debt. Most also have personal loans they cannot afford to repay. . If consigned to debt servitude a generation of enterprising business people – job makers – may never create another job.
What’s needed is a just, equitable and humane system whereby some, but not all, of the billions recklessly lent to ordinary people would be written off. The bit that should be written off represents that portion people have no hope of repaying, including unsecured personal loans, credit card debt, personally guaranteed business loans and unaffordable negative equity.
A recently reported court case starkly illustrates why there must be a just and fair debt settlement system. The case involved a credit union pursuing a customer for repayments on €36,000. She also owes another €103,000 in bank loans. Despite knowing she suffers from a terminal illness, her credit union subjected her to the stress of this country’s draconian debt collection system. Unable to work, her only source of income is a meagre weekly disability payment of €200 and €150 a month children’s allowance for her young son. Hamstrung by the law, a humane judge set repayment at €10 a week and noted it would take 69 years to pay off the loan. The credit union could have written off the debt but it didn’t.
Pursuing people for debts they have no means of repaying is not unique to credit unions. Some banks and finance houses engage in a ruthless race to grab their share of wallet first, which is why court lists are burgeoning from debt recovery actions. It is an inhumane, inequitable system known to cause significant economic and social costs.
Alternative debt settlement systems exist in other countries where the principle of “earned debt forgiveness” applies. They have organised, regulated debt settlement processes.
Their settlement programmes are far from soft on borrowers but critics of such debt settlement systems here warn of moral hazard without being able to produce a shred of supporting evidence other than to allege that freeloaders will abuse debt forgiveness. They also say that “good” people who didn’t over-borrow will not want to bail out the “bad” people who did.
The principle of debt forgiveness means a person pays what they can and the balance owing is written off. The deal is this: If they pay what they can over a specified period of time, usually five years, their lenders agree to write off the balance owing at the end of the debt settlement period. People are legally required to commit every cent earned above a basic living allowance to repay their debts. During the debt settlement period, families are forced to live on near breadline incomes. But they know that if they keep to their part of the bargain they can once again participate fully in society. Business people know they can build new businesses and once again create jobs. Lenders know they will not incur debt collection costs and can plan to fund their loan writedowns. And governments know the economic and social costs of unaffordable indebtedness are minimised.
In other countries the principle of debt forgiveness underpins their entrepreneurial business class and whole economies. Their business people know that if they fail they will not be consigned to a life of penal debt servitude. This safety net of structured forgiveness is a fundamental requirement and necessary condition for risk taking which is wholly absent here. Our debt collection and personal insolvency bankruptcy laws commit people to 12 years servitude and longer if they cannot pay the costs involved.
The cost of living in modern society is the risk that a credit bubble will cause an eruption in unaffordable debt. The problem is bigger than our neighbour’s reckless borrowing. It cuts to the heart of economic recovery.
Bill Hobbs is a financial writer and former chief executive of the Credit Union Development Association
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