It totally depends. There is nothing shameful about declaring bankruptcy because you got into an accident and your insurance company refused to pay your six-figure hospital bill. But if you take out a big loan to build a new hotel and blow it all on hookers and booze? Fuck yeah you should be ashamed (and also go to prison).
What if I take out a loan, am perfectly capable of paying it off, but the asset backing the loan has lost sufficient value so as not to be worth the continued investment? Is there any shame in defaulting and letting the lender suffer some of the consequences?
In my personal opinion, no. Especially with secured or collateral-backed loans, the lender knew there was risk going in and there's no reason they shouldn't also suffer some losses in the case the plan doesn't work out.
This is the situation many Americans found themselves in after the last housing bubble and it still makes me sad that some people still feel a sense of obligation to corporations that would screw them in a heartbeat if it would make them a legal dollar.
My wife and I at one point were in the hole nearly 1m. The crash put my house way under and the job money fun time went away. It sucked. You know what we did. We canceled the cable TV, we stopped eating out. We watched every penny. I work jobs I hated, hated, hated. We got credit councling and got on a plan with them and stuck to it. We paid our debt.
I am by no means saying that banckrucy should not be an option in some cases. Our medical systems is a mess and that is a huge cause of banckrucy. However let's be clear people signed those loans without understanding it and it is their fault. I knew the cost of the interest only loan I had. I got burned but it was a bet I entered after doing research and math, etc. When it did not work out I sucked it up and delt with it.
I agree that some companies did some shady stuff, but really? You get something to good to be true and you don't question it? The consumer has to take some responsibility for their actions.
I am glad you and your family were able to work your way out of the debt you found yourself and I commend you for it. Many others are not able too. Provided they did not get themselves into debt just to keep up with the Joneses' while living on credit cards, they should not be ashamed or made to feel stupid for taking advantage of a legal option that has been priced into their loan via their interest rate.
You talk of doing the math and taking a bet on your loan. The lenders do the same math and take the same bet. They just don't apply any moral imperative to their actions.
Life happens, and at the end of the day their is no shame in looking at the math and your situation and determining that the numbers don't add up and its time to reset.
The companies that lent them money for the second time should have gotten a clue, shouldn't they? Isn't this precisely what credit reports are for? It is definitely stupid to live over one's means and then go bankrupt, but it is just as stupid to lend money to people that have proven themselves irresponsible in the past, and so whoever lends to them should also suffer the consequences.
Regardless of what anyone says to the contrary, we all want the world this way. When we need credit or a loan, we want it to be easy to get because "we'll be responsible about it" and we don't want to be burdened with everyone elses irresponsible debt baggage.
If this was really a problem for lenders they would adopt different practices to avoid this sort of outcome. So instead they are happy to persist it and use whatever tactics they can to maximize their benefit. Lenders lend. They know the risks. They've been doing it for a long time. And they're smarter than you. I'm sure they appreciate your help in fighting their version of the good fight.
Most people aren't consciously running up debt with plans to declare bankruptcy. It happens, but they're not any sort of population to fall back on for an argument about a worldwide system of debt and lending. Using them is really an argument for your own ego and how you're a better person. Maybe you are. But it really has nothing to do with the other 7 billion primates on the planet.
There is this statement that about 60% of bankruptcy are from medical debt. Here is a quick over view of that number:
http://www.snopes.com/643000-bankruptcies-in-the-u-s-every-y...
So lets say it is true (it likely is) then what are the other 40% from?
The problem I have with your statements is that you make the companies out to be evil. They should know better and not lend anymore is what you are saying. However how does that work? Should that 60% that filled for the pure reason that someone got really sick not be able to get credit later? Should we have 2 classes of the ability to get credit after bankruptcy? "Okay, well it was medical so no issues. Hey looks like you spent to much but you learned you lesson this time so I guess I will give you a loan. Hey you seem to have not learned your lesson so no loan for you." This is a slippery slope. How does a company value all of this? The answer is they cannot really. There is math behind the lending and it is faceless and has to be because anything else is subjective and could be discriminatory.
This is no different then:
"Hey you should put limiters in to only let the car go the speed limit."
"Hey you had enough soda this week. No more for you."
The company that lends the money can only profile on the finances and payment history. Anything else is really out of bounds. It is not the lenders job to KNOW that you cannot control your spending and they are not EVIL because they do not do so. They are not your parents.
You are blaming the company for something that is the persons responsibility. No one is saying that there are not bad situations were bankruptcy is required. All I was saying that doing it should not be easy. There is a reason a judge is required to rule on this.
If a bad borrower keeps getting loans then it's the fault of the lender. We have nothing to gain by putting such moral weight on bankruptcy.
This was well-said. Without the risk of default the loan would be worthless for the lender.
[0] http://www.goodreads.com/book/show/26593431-the-new-confessi...
that said, fair enough, i was more discourteous than i needed to be in getting my message across, i apologize for that.
Your point that the risk premium you pay while taking a loan implies that the lender is willing to take some pain from your failure is sufficient in itself.
The interest rates you're being charged aren't tailored specifically to you. But they look at everyone else with similar income and credit and look a the default rate and figure out what they need to charge to make a profit.
It's the sum of the whole lending business, not individual loans, that matter. They'll do as much as they can to mitigate the loss on loans that do default. It's just throwing money away not to. But they've got it all figured out to loan money, have some of it default, and still make plenty of profit. The idea that the minority of people who do default and declare bankruptcy causes them any pain is really quaint and naive.
But boy is that an image their PR would love to get everyone to buy into. If you can convince people to feel bad. If you can convince society as a whole to shame and pressure people into doing something that's the most advantageous for lenders, that is just a lending vision of utopia.
(Disclaimer: I've never been in serious debt or declared bankruptcy. There's no morality that should be implied or assumed by that.)
But don't these number take into account the fact that the average person is scared/ashamed of defaulting? If personally declaring bankruptcy were much more common, would interest rates be where they are right now?
BTW: We've got to watch out for these financial guys, they'll try it again if they have the chance.
And the housing market really went off the rails because people were making stupid bets. Does the casino enable stupid bets? Damn right. But we don't blame them when a gambler loses all their money on a stupid bet.
I'm as pissed as anyone that bankers didn't go to prison en masse, but what they did was package mortgage debt up as more safe than it was. It was home buyers eating up easy money with no restraint that caused the pricing to hit bubble territory.
I think the only reason for that is follow the money. Casinos pay taxes. I'm trying to follow a machine learning mooc and I'm just realizing how much humans (specifically me) suck at classification and at pattern matching.
Planet money I think asked the question: if sugar is addictive, why isn't it regulated?
My questions are Why is alcohol regulated? Why is tobacco regulated? Why is cocaine banned? Why can't we have kinder surprise in the us?
Why is gambling a state monopoly? Why does a casino need a license?
We all don't agree on everything but there's plenty of blame to go around if you think of gambling as an addiction (and addiction as a disease to be treated rather than an excuse to kill people). I think of gambling is a disease, casinos are a "guilty until proven innocent". Sort of like Google's famous " don't be evil" motto which recognizes that an organization in this position is likely to steer towards being evil by default and only by constant vigilance can we prevent ourselves from being evil. In the case of many casinos, I think it is just a matter of cover my ass when they have programs against gambling addiction.
tl;dr I love the idea of personal responsibility but we can't throw people in prison for victimless crimes.
And I agree that sugar should be regulated and taxed, or that we should at least do more to educate them on how destructive it can be to health.
Except that the price of houses rise when everyone else can take out loans beyond their ability to pay. You can't opt out of this game.
Not to mention that most of the people defaulting on their mortgages had the ability to pay - until they lost their jobs. Which they lost because of other people defaulting on their mortgages. The economy was a tinderbox.
Sure, people make bad decisions. But how can they be expected to make better ones when the people that are supposed to be relied on for good advice give such bad advice.
Who has ever said that banks are supposed to be relied on for good advice? Hire an accountant for that, the banker works for the bank, not you.
What do you mean "more like fraud"? Immoral behavior and fraudulent behavior are not mutually exclusive. It is possible for something to be both immoral and fraudulent, such as the example I gave in my post.
>>What if I take out a loan, am perfectly capable of paying it off, but the asset backing the loan has lost sufficient value so as not to be worth the continued investment? Is there any shame in defaulting and letting the lender suffer some of the consequences?
No, I don't think there is any shame in that. Like you said, the risk for that is known upfront and is therefore built into the interest rate.
I'm sure you would enjoy 18th century england and US. Debtors prison was once totally a thing. I like to think of it's dismissal as an evidence piece that a civilization evolves.
When considering seriously hard punishments, think for a while what if the person is actually in the situation from no fault of their own. Because, court often has a hard time doing any moral judgements and just looks at the cold facts.
Defaulting on a debt is not about shame. Governments don't feel shame. The ramifications are that future credit becomes much more expensive, as the next contract's debt provisions will be harsher.
> No surprise that it's mainly bankers pushing the "it's immoral to default" line.
Plenty of honest, hard-working individuals pride themselves on always paying their debts. Similarly there are those who think that you shouldn't extend yourself beyond your means. It's not just bankers who consider not paying dues to be immoral.
Interesting to note on the corporate angle, bankruptcy laws are a fairly-recent invention. (Where by "fairly recent" I mean "several centuries".) The US's laws, in particular, are credited with fostering some of the innovation in this country, as they reduce the impacts of failure.
Yet, in any thread where Greece, Puerto Rico, etc come up there's this strong backlash against defaulting as being somehow immoral (as though it's not written into the lending agreements). What exactly is the difference between burning a bunch of VC money then shutting down and defaulting on a loan? In both cases we have an institution putting money at risk in the hopes of making a profit, and then losing it. I don't see the big moral difference here.
I don't subscribe to the notion that "bankruptcy is immoral", it's just a business transaction within the established framework with checks and balances in place.
That said though - situation with startups and business development loans in general is a little different because startups are by definition attempting to turn the idea they present to investors into reality with investors' money. So unless they fail because of a blatant mismanagement of funds (which does happen of course) - in a typical startup failure situation where something is built but there's no more runway and no more money coming in and no buyers to take over the operation - this just feels like it's easier to justify the less negative vibe around that situation.
Multi-billion dollar governments go bankrupt because of mis-management. Less "Uber For Dogs" and more "Enron", minus the intentional criminality. Governments go bankrupt because its citizen "shareholders" vote for continued debt accrual and negative EBITA. But citizens don't care. It's OPM: Other People's Money. Since they're also "customers", their goal is to get as much possible out.
The other point is (arguably) that government should not be risking bankruptcy for the sake of innovation. Which in the cases of government bankruptcy, was not the reason for insolvency anyway. So then it comes back to mismanagement, where maybe the better analog is personal bankruptcy. If an individual came to you and said they were declaring bankruptcy because they had spent more than they made for the last 20 years, you probably wouldn't have much sympathy.
But it seems like it would honestly be the opposite (i.e., government bankruptcy being bad). The more people that are involved, the higher chance there is of a tragedy of the commons
Suppose someone living the HN dream makes a bunch of money from his startup, and decides to pay off his mortgage. It might be structured as a loan from his company to himself, which then has zero risk.
A bank processing an FHA loan has zero default risk, since the government steps in to pay them. And they often sell the loans to a government-run company anyways.
A bank giving a conventional mortgage will often require 20% down, and again they resell the loans to a government-run corporation after a few years anyways. If you default in those first few years, they effectively get a 20% discount on the original purchase price of the house when they take it. Not zero-risk, but the 2008 financial crisis appears to have only had a 30% drop in house prices. (Obviously, subprime lenders can't resell their loans to the government, and didn't require a heavy down payment)
Generally speaking, the idea that interest mostly pays for risk assumes that there is no 'low-hanging fruit' where guaranteed returns are possible if only there was money. Paying down high-interest debt is one form of guaranteed return, so theoretically there shouldn't be such a thing as high-interest debt if the market was mostly efficient.
I guess the conclusion of your view is that: If people were more diligent about handling their money, banks wouldn't make as much risk-free money.
That's very likely the case. Although the real world does not like zeros and tries hard to push some complex high order effects that will be triggered before any zero is realized.
Except student loans :(.
Are those committing fraud too ?
What, incidentally, about politicians who force pension funds to buy bonds "they like" by legal means ? (at least 200 politicians in current service are guilty of this)
These are US government bonds, by the way, if a default happens with them, the sort of organisation that will suffer the most is US pension funds.
[1] https://en.wikipedia.org/wiki/United_States_federal_governme...
Also the reason for default does have some bearing on morality -- a person that declares bankruptcy because of years of buying a new TV every year and going on expensive vacations is much different than a default due to factors outside of one's control (such as being laid off or suffering a medical catastrophe.)
Puerto Rico has, for years, knowingly overspent without much of a fiscal plan to pay debts. This issue isn't due to forces outside their control, but specifically because of decisions they consciously made. It is political malpractice and the people of Puerto Rico will now pay the price for generations. If that isn't immoral, then immoral has lost all meaning.
So the children of the children of the children of people of Puerto Rico should accept their situation because of "decisions they consciously made"? They're not even born yet. How does that work?
The C- students that became bankers can't be expected to actually work for a living!
(Sarcasm)
Also how to resolve this situation ? You do want a pension, right ?
I don't know about "taken lightly" but bankruptcy and defaulting on a debt should not be something to be "ashamed" of, for an individual, a company, or a government. Default is an option specifically written into every debt contract out there. There should be no more shame in choosing to default as there would be for choosing to exercise a stock option that causes your counterparty lose all his money. Lenders reap a huge premium for doing nothing but assuming the risk of default. If there was zero risk there should be zero premium.
No surprise that it's mainly bankers pushing the "it's immoral to default" line.