Debt can be its own prison–it limits your choices and your future. But most of us who have debt nowadays are far better off than we would have been 150 or 200 years ago, when you could still go to prison for not paying your debts. Nowadays, if we can’t pay, we declare bankruptcy. Probably.
Unfortunately, this has led some people to treat their debts with an almost-criminal disregard. For example, the LA Times recently reported that more and more homeowners are ‘strategically defaulting’ on their loans.
These aren’t people with low credit scores or a history of not making payments. These people may even continue making payments on their other debt. They tend to live in areas where the house prices skyrocketed during the early 2000s and plummeted in the last few years. Analysts call these defaults ‘strategic’ because the people knew the consequences and benefits of walking away and chose to do so.
Do Americans take debt seriously enough?
I don’t think so.
Despite the title, I’m not in favor of imprisoning those who can’t pay their debts. Prison won’t allow them to pay their creditors back and serving time isn’t what their creditors need or deserve. But I do wonder what will make people take their debts seriously enough.
Perhaps it’s time to do away entirely with the myth of “good debt.” I don’t disagree that debt is a tool–it’s hard to save enough to buy a house and pay rent at the same time, a mortgage allows you to put all that money toward the house (and interest!).
But while the idea of “good debt” allows us to separate the never-good debt from the debt-as-tool debt, we need to remember that just because it’s a tool doesn’t mean we should have much of it or that it’s always good.
Using the tool metaphor, which so many others do when talking about debt, why not look at how conventional tools aren’t always necessary and could even be bad. For example, Micah & I lead a pretty tool-free existence. We have one repair kit with 2 screwdrivers, a hammer, pliers, etc—the basics.
Were I to start collecting buzz saws, power drills, and the like, we’d have trouble fitting them in our one-bedroom apartment. Purchasing more tools than we need, tools that we’d never use, would also put a strain on our finances. You’d probably take a look at our apartment and bank statement and tell me “just stop buying all those tools!”
Yet people do this kind of thing all the time–mentally writing off debt as a tool and not asking whether or not they need this tool or they need this many tools. Having established that debt is a tool, people then buy more house than they need or can afford, more car than they need or can afford, even more education than they need or can afford.
A social worker who plans to work with abused women does not need a degree from Harvard. A college student does not need a brand new car. I don’t need a house any time soon.
What do you think? In favor of debtor’s prisons? Got ideas about how to help people take their debts more seriously?
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Debtor’s prison sounds wise, or something like it. Although I’m not generally for more government regulations, it may be the only way to get people to pay back the money that they spent.
.-= Emily @ Under$1000PerMonth´s last blog ..My Blog Poll =-.
I’m not a fan of debtor’s prisons. 🙂
I don’t see anything wrong with “strategically” doing anything. If you borrow money from an institution you have an obligation to yourself to pay the money back if you can. If you can’t pay the money back then you have to look at alternate solutions which could include walking away from a house, bankruptcy, working out a deal with the bank etc.
Banks make money from lending and along with that profit comes risk. The bank has an obligation to its shareholders to maximize profit, reduce risk, stay solvent etc.
The homeowner also has an obligation to its shareholders (themselves) to maximize profit, reduce risk, stay solvent etc.
Sometimes it just doesn’t work out. The owners knew the risks involved with the mortgage (credit rating etc) and so did the banks.
.-= ABCs of Investing´s last blog ..More Exciting Facts About Stock Indexes =-.
While I think the idea of debtor’s prisons is one that belongs in the past, I do think there is something wrong with people not taking personal responsibility. I don’t know how to describe it, but I feel like society’s ethics, in particular when it comes to debt, have gotten a lot worse over the years.
.-= Dawn´s last blog ..House Painting Finale =-.
I think you summed it up all right here” Do Americans take debt seriously enough? I don’t think so. ”
People don’t take debt seriously! Everyone has it and why should I be any different? I think one think that really hit hard for me is when we bought our home, the debt was huge in and of itself, but when I saw some of the paperwork showing how much the final cost would be if I made minimum payments for 30 years at the interest rate, I was shocked to think I was in that much debt.
I think most people just turn a blind eye to debt, use it and forget about it while making minimum payments. If more people took it seriously, maybe they would save beforehand and end up without so much debt.
.-= Jesse´s last blog ..Review & Giveaway: Secrets of a Stingy Scoundrel =-.
Debtor’s prisons were pretty hopeless – there’s a reason why Dickens railed against them.
I guess I’m in the minority along with my Canadian friend – I don’t think that debt or bankruptcy are moral issues. Bankruptcy exists because some debts cannot be paid off, and creditors need another way of getting some of their money back. When an institution lends you money they are aware that there is always a risk that you will default.
I do think that recovering from bankruptcy is and should be timeconsuming, but that’s because if you’ve defaulted on your debt there’s a possibility you might do so again.
Hi Mrs. Micah,
That’s a very catchy title! I also don’t feel that debtors prison or serving time in jail is the solution for “strategically defaulting” on debts or loans.
This sort of thing is just more of the same – people’s “want” list being taken more seriously than their “needs” list, and they end up with a ton of debt they can’t possibly afford to pay off.
Maybe people would start taking debt more seriously if it wasn’t so easy to just file for bankruptcy and “start with a clean slate”. Maybe if people were turned down when trying to file for bankruptcy, people might realize they have no choice but to pay off the debts and bills they CHOSE to accumulate, and learn to live within their means (or BELOW their means) instead of trying to keep up with the Jones’es.
Mmm… I don’t know. At heart I agree with the article. It angers me to no end to watch people just throw in the towel and refuse to pay consequences for their choices. However, medical problems are the most frequent cause of bankruptcy. And a lot of times those people were insured. If you get hit in a car wreck or develop cancer and you’re insurance only pays 80% and you can’t pay the 20% because it’s several hundred thousand dollars is that really your fault? I see those types of situations differently then the “I have to have 5 of every color, and I can just pay it back later” mentality or refusing to work hard for something.
.-= Shakela´s last blog ..Stolen by Kelley Armstrong a review =-.
It’s a radical idea, but wouldn’t people think twice about just walking away from a home? Okay so no, they shouldn’t come back. We all know that money bankruptcies are caused by medical catastrophe. People are generally decent and want to pay their debts, but you will always have the problem of knowing who is just trying to game the system, and who was a victim of circumstance if we were to toss people in prison.
Now, I’m not opposed a public flogging (KIDDING!).
.-= Cheapskate Sandy´s last blog ..Finance 101: What the Heck is Peer-to-Peer or P2P Lending? =-.
Your title definitely caught my attention 🙂 While, I don’t think we should be bringing back debtors prisons any time soon, I certainly agree with your premise that more and more consumers take on debt without thinking of the ramifications.
I think a big part of that is the buy now pay later retail culture that is so prevailing in society today. Also in many ways it is easier for consumers to throw in the towel these days, especially with homes in this current economy. In many cases banks will not, or cannot send the former home owner a bill for any deficiency balance on the mortgage when the home is foreclosed.
Think about it. Almost everyone that purchases a new car is upside down in value the minute they drive away. Yet, how many people just toss the keys back to the dealer? Not many, even after a few years, they aren’t just walking away from their cars.
The reason is because they know the bank will go after them for the deficiency on the loan.
I think it all comes down to education, and that has been lacking in our public school systems. We don’t even teach basic financial concepts in high school. Yet people are shocked that consumers are irresponsibly borrowing money. Start educating the public and a lot of these problems will be dramatically reduced.
.-= Damon Day´s last blog ..Debt Help – Who can You Trust =-.
Debtors’ prisons…not so much. More severe repayment plans and other ‘punishments’ that made bankruptcy much more difficult on the average person? Now, that I could get behind.
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