

When Debtors Decide to Default - cwan
http://www.nytimes.com/2009/07/26/weekinreview/26streitfeld.html?_r=1&emc=eta1

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krschultz
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.

~~~
lurkinggrue
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.

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pmichaud
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
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.

------
elecengin
"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
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.

~~~
stuffthatmatter
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.

~~~
ubernostrum
I didn't come here to see mindless talking points parroted back at me.

If you want to actually talk about the complexities of debt and the problems
on all sides of the issue, by all means do so. If you want to shout slogans,
please go somewhere else.

~~~
stuffthatmatter
It's really not that complicated.

People are walking away from debt obligations. \- mortgages (12% of all
mortgage, 50% subprime, 50% options) \- credit cards (13% default) \- personal
bankruptcies (up 28% in second quarter)

federal/states/local governments are walking away from debt obligation \-
pension reduction \- massive printing of dollar, $250B treasury selling this
week

Companies are walking away from debt obligation \- commercial mortgages
delinquency up 586% this half \- pension discharged by bankruptcy

Guess who's paying for this. That's right; the taxpayers.

So. Are you the sucker that's gonna keep on paying taxes?

All these you can google yourself (too many links to list here) I didn't come
here to list all the bad things, since I doubt you even comprehend 1% of the
atrocities. Therefore, I kept it simple for you.

~~~
RobGR
If society decides to declare a general "jubilee" year, and cancel all debts,
and you decide to pay off yours, it is true that you are at a disadvantage.

If society decides in general to massively devalue the currency to help
irresponsible borrowers, that will punish responsible savers.

However, these do not imply "not working". That can imply not valuing currency
as much, so you consider your salary less, or defaulting on your own debts
even though it is distasteful to you, or all sorts of things, but it is
unlikely to work out well for you if you are on strike while the prolifigrate
borrowers are not.

If you want to go on strike, you will have much more effect by going on a
spending strike rather than a working strike. I have been considering getting
a bumber sticker for my rusty 1988 VW that says "I am going to keep fixing and
driving this POS until the bailout money is paid back".

~~~
lurkinggrue
While I will agree there a tons of irresponsible borrowers but I wish people
would give some anger over the irresponsible lenders that helped create this
mess.

There were far too many companies willing to throw as much credit around as it
was more profitable to lend more than people could handle.

It was getting to the point that all you needed to get $10,000 of credit cards
was a pulse... and even then that wasn't needed.

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shizcakes
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
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.

------
RobGR
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.

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

~~~
jsdalton
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.

~~~
jrockway
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...

~~~
mainguy
That doesn't make sense. The banks make money off people who carry a balance.

~~~
jrockway
They don't make much money off people that rack up $25,000 of debt and then
refuse to pay, or people that borrow $500,000 for a house that's worth
$150,000 who then leave and stop paying the mortgage.

People that pay the minimum payment on their credit card every month are great
-- if everyone did that, there would be no credit crisis. I would be getting
my 5% on savings, and would probably be able to own a house.

~~~
Retric
Actually most banks did make money from those transactions. They knew it was a
bad debt so they sold it before people defaulted. The US housing bubble
actually ended up sucking up a lot of money from the rest of the world and
dumping in on the US economy.

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tophat02
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
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.

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

~~~
superjared
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>

~~~
ryanwaggoner
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>

~~~
aarongough
From personal experience with some people very close to me I believe that it
is actually better not to have the option to borrow at 25%.

All it means is that they are able to live outside their means until they can
no longer pay the minimum payment on their credit card, and at that point they
are in deep trouble.

I firmly believe that the banks are too predatory these days. If a particular
person is deemed too much of a risk to lend to then they _should not be lent
money_. How is it a better idea to lend them money at a higher interest rate?
All it does is (possibly)make more money for the bank and forces the rest of
us to offset the risk in the form of higher interest rates.

~~~
tjic
> I believe that it is actually better not to have the option to borrow at
> 25%.

I can think of thousands of reasons why I'd like to have that option.

On example:

My dog gets hit by a car and it will cost $4k to save her life. I have an
extra $1k in my budget each month, but only $500 in cash reserves.

I'd pay 200% annual interest.

If I lived in a paternalistic "aarongough knows best" society, my dog would
die.

Please don't be so quick to imagine that your preferences and resources
(parents, friends with money, etc.) apply to everyone else.

~~~
RobGR
Dude, let the dog go. That is not an appropriate decision. If it was a person
who was hit, then it would be ok to borrow at that; but I pay property taxes
so the county hospital will fix the broken bones of indigents.

Unless the dog brings in income comensurate with that, like a high-end herding
or show dog, it is irresponsible to spend that much on a pet. Even if you had
the $4,000 sitting right there.

If I were judging your credit card application or a loan application and I had
your post in front of me, I would be inclined to think that you did not make
responsible financial decisions and not approve your credit.

P.S. I like dogs.

~~~
Evgeny
The dog does not bring home money, but so do not, for example, overseas
vacations or even going to the movies. Would it be irresponsible to spend
money on movies or tourism because this money produces no income for the
spender?

The dog does bring positive emotions, and the loss of a pet brings negative
emotions. These emotions can easily be valued by a person (owner) way over the
$4000.

P.S. I like cats.

~~~
RobGR
There are many situations under which a person might spend $4,000 on a dog.

But we are talking about the specific situation in which you don't have $4,000
and intend to borrow it at 25% interest. In that case it is not socially
acceptable to spend $4,000 on the dog. To note your other examples, it also
irresponsible to borrow $4,000 at 25% interest to go to movies or spend on
overseas tourism.

Note that I am not just claiming that it is unwise and irresponsible (it is);
I am also claiming "social acceptance" in that society in some sense backs
this up. My evidence is this: if you bring a child in need of $4,000 in care
to a doctor, and don't have $4,000, the child will get the care; you may be
dunned for the bills, but the child gets fixed.

You bring a dog into a vet, and you are indigent, the dog either gets given
away to someone who will pay or it gets the needle.

My personal views go further, in that even someone who has $4,000 is being
irresponsible by spending it on a dog (in most cases - a breed in threat of
extinction or a highly trained dog might be worth it, I am sure many seeing
eye dogs are worth $4,000 and not replaceable for that). But I know that many
people hold the opposite, and would even say you should not own a dog if you
are not willing and able to pay $4,000 on vet expenses.

If you have to borrow at 25%, then you fail the "able" part of "willing and
able".

One of the things that will come out of the current economic situation is that
our society is going to be less accepting of people who do things like borrow
$4,000 to spend on pet bills.

