Faced with a consumer debt crisis, we need a legal system that allows people to pay what they can and earn the right to have what they cannot hope to repay, written off.
Advanced societies have long recognised the dire social costs of unaffordable indebtedness and provide debt resolution systems that allow people to once again become productive members of society.
Differing in detail, the essential element is your right to earn forgiveness after a period of paying what you can. In this time you are expected to live off a basic income and pay the balance of what you earn to those you owe money to. The bargain is you pay what you can afford and the balance is written off.
Enacted during the nineteenth century, our debt laws are wholly out of step with our advanced society and its consumer credit economy.
Our laws protect creditors absolute right to recover money owed, enhance their ability to pursue debtors and can confine ordinary people to prison or consign them to bankruptcy for over a decade. They are by far the most draconian, antiquated and inequitable laws of any advanced society.
Published earlier this year, the Law Reform Commission’s proposal for a humane system has been sidelined by a politicised response yet to provide a meaningful solution to mass unaffordable indebtedness.
The recent interim report of government’s committee on personal debt and subsequent Financial Regulator’s proposals merely delay the inevitable decision – either we opt for wholesale home repossessions or introduce a debt resolution regime that deals with the totality of consumer indebtedness.
Recently while listening to one person’s debt story, I was struck by one observation. The individual relating the story seemed to me to imply that people would use Government’s twelve month stay on bank home repossessions to favour their other creditors over their mortgage lender.
Such thinking reflects a spurious, unfounded moral hazard argument that ordinary people struggling with unaffordable indebtedness will manipulate their financial situation to extract maximum benefit.
Moral hazard proponents ask us to believe, for example that a married couple with three children living on €600 a week having a mortgage of €200,000 and other debts of €50,000 will pay their other creditors first as they know their house can’t be repossessed for 12 months. Are we to believe that they will financially plan to do this and abuse the stay on repossessions?
Such thinking reflects the Dickensian creditor protection orthodoxy of an official Ireland that cannot yet accept or deal with the enormity of private citizen’s debt crisis. Moral hazard is a common thread in official commentary and expounded by those who hold themselves out as self-appointed gatekeepers. Some once advised people to maximise their use of personal credit and leverage into the boom time property market. Today they are purveyors of advice on how to manage unaffordable debt. Having made money advising people to over-borrow, many make money advising people how to manage their hopeless indebtedness.
Many act as if we are dealing with a run of the mill debt problem. We are not. Tens of thousands of people who have always earned reasonable incomes have suddenly fallen into debt through no fault of their own. They no longer have the income or repayment capacity to fund their loan repayments. And will not have for many years to come, if ever again. Some are so hopelessly indebted that only a humane personal insolvency regime will allow them to become productive members of society once again.
Most lenders know this but in the absence of the reforming system proposed by the Law Reform Commission and a solution to mass mortgage indebtedness, they use the current legal system to protect their rights to recover in full what they are owed – even where they realise they will never do so. Both lenders and borrowers need a way to work out what can be paid and what cannot.
Struggling to respond, the state funds a free to user, debt advice service originally designed to help the most financially vulnerable and marginalised in society. Provided with a mere €17m a year, MABS provides a valuable service to those dealing with their indebtedness. But it’s a service not designed to deal with the sheer scale of the problem and is hamstrung by its limited resources. At the very least it should be provided with all the resources it needs and its costs levied on those who benefit most – lenders.
Those who would treat people in debt as near criminals, accuse them first of wilfully over-borrowing and then likely to abuse a forgiveness regime, miss a fundamental issue. Modern societies realise that they cannot consign their citizens to decades of debt serfdom simply to protect the rights of those who should have acted with greater prudence in lending them money in the first place.
A version of this article appeared in the Irish Examiner Monday August 23rd 2010, Business Section
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