When Debtors Decide to Default

http://www.nytimes.com/2009/07/26/weekinreview/26streitfeld.html?_r=1&emc=eta1

by cwan • 17 years ago

43 44 17 years ago

shizcakes• 17 years ago

This article is severely lacking in a discussion of consequences. Publishing an article like this, given the average intelligence level of Americans these days, is irresponsible. I have debts to repay (student loans!), and the idea of "just not paying" is very charming, but there are real consequences for these actions. It's not something to be done lightly or 'because I want to'.

jsares• 17 years ago

The difference with Student Loans is you can't just avoid paying them. With most debt you can discharge it through a bankruptcy but since 1998 you can no longer discharge student loans unless it would be an "undue hardship". After you default they will simply attach your wages for up to 25% of you after tax salary.

pmichaud• 17 years ago

People don't do it lightly, they do it because they are desperate and realistically the only consequence they really face is a crappy credit score. They are okay with that... many already have tanked credit before they start this.

rdtsc• 17 years ago

Once millions of people have bad credit scores and bankruptcies in their credit histories, the social stigma of a bad creditor gets diluted. That becomes a self-reinforcing process. The more individuals default, the less defaulting looks bad.

I believe that it was social and moral norms rather than clear cut financial analyses that stopped people from defaulting. It seems those moral norms have changed.

People have simply lost faith in the system. They don't care about being nice little creditors, wrought by guilt if they overspent or made bad financial decisions, when the government is handing out hundreds of billions to to-big-to-fail banks.

Then as if mocking everyone, banks go ahead and hand out tens of millions as bonuses to their CEOs.

I cannot see anyone watching this circus feeling too guilty about screwing up and then not paying back $10000. Everyone, wants a bailout.

johnrob• 17 years ago

The big winners are the businesses that sold products to these consumers. The losers are the banks and consumers themselves.

jsdalton• 17 years ago

I think the biggest losers are actually "the rest of us": i.e. those of us who neither borrowed more than we could afford to pay back nor lent to those whom we knew could not afford to pay us back. There aren't many bailouts or special government programs (at least that I'm aware of) for people who acted responsibly in the midst of what was obviously foolishness.

stuffthatmatter4• 17 years ago

I am so glad I barely pay any taxes anymore (income and spending)

jrockway3• 17 years ago

Indeed. I feel very screwed over by all of this. Making the wrong decisions got people lots of free money. Making the right decisions got me nothing, except interest on my savings account is now so low that it barely makes up inflation. (It was nearly 5% before all this!)

All these people that don't pay off their credit cards ensure that those who do get higher interest rates and fewer services. Thanks a lot, guys...

krschultz2• 17 years ago

The reason why Bank of America (or any lender) jacks the interest rate up on people failing to pay is quite obvious - people will pay off the most expensive debt first and then work there way down to the low interest rate stuff. By positioning themselves as the highest interest rate, that lender gets paid first. But that makes the debtor more likely to simply default because the interest is killing any hope they had of escaping. Add in multiple lenders all trying to play the same game and it is no wonder so many are simply unable to get out of debt.

It would be nice if lenders really stopped giving loans and credit cards to these people in the future, but I think plenty of people will default and in 5 years be back on new credit cards and new mortgages that some will end up defaulting on again.

lurkinggrue2• 17 years ago

Or they go though it once and opt out of the system after that and live on cash. I know many people now that refuse to have a credit card as they became far too expensive in the long run.

elecengin• 17 years ago

"With all the bailouts the government is giving everyone, no one has any personal accountability about their own debts."

So true. The sanctity of an obligation, as the article discusses, was destroyed when the government ruled one side of the obligation less sacrosanct than the other.

Is that an excuse for lenders to run away from their problems? Absolutely not. It is no more valid than the child's argument "he/she did it first!"

donw• 17 years ago

Not quite -- the money for the bailouts comes directly out of the taxpayers' pockets, in the form of taxes. So debtors, who are nominally also taxpayers, are effectively having to pay these companies twice. Once, because of their own poor decisions, and again, because of the lending companies' poor decisions.

In this case, I think that not paying is more a form of civil disobedience, Thomas Payne style, than anything else.

stuffthatmatter4• 17 years ago

I didn't feel like working so that my neighbor can walk away from their mortgage and my relatives can walk away from their credit card debt. So I don't anymore.

zngtk4• 17 years ago

Most people who are defaulting on the loans essentially pay nothing in taxes (excluding the payroll taxes, which allegedly are separate).

snorkel• 17 years ago

25% interest rate should not even legal in the first place. Do banks offer consumers 25% on savings interest? Not even close.

joshfinnie• 17 years ago

I agree, there should be a set limit that people can charge. It can be fixed to the fed's rate, but no more than 10%. There is no reason I should be making 0.0025% on my savings but being charges 19.5% on my credit.

chollida1• 17 years ago

> There is no reason I should be making 0.0025% on my savings but being charges 19.5% on my credit.

Technically there is a good reason.

You make so little interest on your savings because you are lending money to the bank, which means due to the banks credit rating and CIDC insurance that you are very unlikely to loose your money.

When the bank loans money to you via your credit card, they are taking a much much larger gamble. If you go bankrupt there is no CDIC insurance to protect them and give them their money back.

Hence the higher interest rate.

How big should the spread be? That's an entirely different question:) The

jrockway3• 17 years ago

Nobody is forcing you to pay 19.5% interest. My rate is lower than that, but I never carry a balance, making my rate 0 (but with all the conveniences of a credit card). If I overspend, which sometimes happens, then I pay for it out of savings. That money is doing anything for me (1.5% interest, or whatever), so I might as well pay off the credit card with it.

superjared• 17 years ago

Usury laws have been around for hundreds of years. Why the hell don't we (the USA) have them anymore?

http://en.wikipedia.org/wiki/Usury

ryanwaggoner3• 17 years ago

Usury doesn't mean that high-risk debtors will have access to credit with reasonable interest rates; it means they won't have access to credit at all. If you're in a situation where your best option is to take a 25% loan to pay for bills, that's a truly shitty situation, but how can it be improved by taking that option (which we just agreed was your best option) off the table?

Some of my thinking on this subject was the result of this excellent thread on payday lenders: http://news.ycombinator.com/item?id=543086

gaius• 17 years ago

Because along with usury laws comes debtor's prison and indentured servitude. It cuts both ways. You can't just pick the bits out of the past that happen to suit you in the present time.

In those countries where they do have usury laws (it's part of Sharia) it's a crime to miss a payment on a loan. You don't get annoying phonecalls from the bank - you get the local law enforcement confiscating your stuff and hauling you off to jail.

krschultz2• 17 years ago

When banks give loans to consumers in the form of credit cards, they charge 25% interest because it is really risky - note the 12.5% default rate mentioned in the article.

When consumers gives banks loans in the form of deposits, they get very little interest because it is so safe - with the FDIC around what tiny percent of deposits have been lost to consumers in the last 50 years?

philwelch• 17 years ago

At that point, the credit becomes a risky investment--a significant percentage of people paying 25% interest will never repay their debts. If there isn't any return on the ones that do, then these people will just get outright blacklisted from credit. (Maybe that's a good thing.)

If you bought junk bonds backed by high-interest consumer debt, you'd get a high interest rate too. Unless you got nothing. But you're probably a safer investor than Bank of America.

It's also a bargaining tactic for when these people finally wisen up and renegotiate their debts through a consolidation agency.

RobGR5• 17 years ago

I hope that society developes a different view of debt and consumer debt in particular through all this.

One thing to note, is that either the paying off or writing off of debt is deflationary -- something that was an asset on someone's books, either simply vanishes, or else is replaced by money that was extracted from the economy.

tophat02• 17 years ago

Why not lend only to people who have already shown that they can handle money? In other words, why not mandate large annual fees for credit cards and VERY high down payment requirements for mortgages?

And yes, in fact, I AM suggesting that we only loan money to people who already have some.

nradov• 17 years ago

During the Great Depression there was significant public sympathy for bank robbers as the banks were seen as having taken advantage of common people. I hope we're not headed for a similar breakdown in social order. Intentionally defaulting on a debt is one thing, but sticking a gun in a teller's face is something else altogether.

When Debtors Decide to Default

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