Forgive bad debts to save our economic souls

 

We have one of the most draconian systems for personal insolvency and it’s set to strangle our recovery, writes SARAH CAREY

OUR ATTITUDE to debt is similar to our attitude to jay-walking. Behind the wheel, we curse the wilful irresponsibility of the pedestrian making a dash across the road. As walkers, we stare down that big car, willing the driver to give us a break.

As financial pedestrians, we’re furious at the banks being bailed out. In theory, developers will owe Nama the same money today as they did the banks yesterday. In practice, deals will be cut to howls of protest that full repayment is not forced. “Take their homes!” the proles cry in vain.

Elsewhere, applications for examinership and receivership rise as companies crack under sectoral collapse. Most are genuine, but one small businessman I know is deeply suspicious. Why is he struggling to pay suppliers while his competitors walk away to start over, unencumbered by overdrafts? It’s not fair. We just don’t like it when people don’t pay what they owe. Whatever about the economics, we have deep moral instincts about debt repayment.

Yet attention turns, slowly and reluctantly, to that other icky pile of financial excrement, the waft from which one has done one’s best to ignore – personal debt. While we want the financial SUVs to pay their dues, these over- borrowed pedestrians command our sympathy. “Save their homes!” the cry goes.

The ESRI’s David Duffy made a stab at calculating the numbers in negative equity (almost 200,000 by end 2010, he thinks), but acknowledges that tells us little. Negative equity is an indicator for, but doesn’t automatically lead to, mortgage default. That requires an “income event” – a job loss.

The CSO says 77,500 are in arrears, but this includes those behind on the rent too. The Free Legal Aid Centre suggests that 30,000 homeowners might default. Each one will be a personal catastrophe and the numbers are high enough to demand that we do something.

Apparently Eamon Ryan is championing the issue at Cabinet.

My auctioneering brother Edward says short selling is the only way. That means the house in negative equity is sold and the bank agrees to accept the sale price as a final settlement, even though it’s lower than the outstanding mortgage balance. This is common in America where most mortgages, especially in states such as California, are “non-recourse”. You last heard that phrase used abusively in relation to Anglo Irish. It means the bank can’t come after you personally for the shortfall.

They should take a hit because while you were unwise to borrow too much, they were worse to lend to you on crazy income multiplier ratios. Karl Deeter from Irish Mortgage Brokers says no plan will work unless the banks are persuaded to buy in, and I’d say they won’t like the sound of Ed’s idea. Even if they did, there’s still significant unsecured debt to be tackled.

The banks will prefer other suggestions, such as payment moratoriums to equity swaps, which really mean the borrower has to pay back the full amount, but under individual voluntary agreements that allow for gradual repayments that protect the family home.

These proposals aren’t enough. Demanding that borrowers pay back every last cent, but giving them a lifetime to do so, will add to our problems, not cure them. How does weighing down a generation with debt help the economy? We need to get things moving again and anchoring tens of thousands to their past mistakes will fatally prevent this.

The right thing to do for the economy, if not for the moral imperative to pay what we owe, is to let people declare bankruptcy. Pay what you can and do a phoenix. When banks, developers and businesses do it we spit bile, but everyone benefits in the long run.

According to the Atlantic magazine, last year one in 300 Americans declared themselves personally bankrupt. In the UK, there were 150,000 personal insolvencies, including 67,000 bankruptcies. In Ireland there were 15. In the UK, people can file for bankruptcy online. In Ireland it involves a High Court proceeding. In the US and the UK the “discharge” period is one year. Here it’s 12 years. We have one of the most draconian systems for personal insolvency in the world, and it’s going to strangle our recovery. We have to change.

Credit institutions will preach the “can’t or won’t pay?” sermon, but what’s good for the goose is good for the gander. We need to make it easy to fail. Some say that will encourage consumers to behave badly. It might encourage banks to lend more wisely.

As America cheerfully accepts, it definitely encourages risk-taking and that’s a currency we all depend upon. Doing penance for our financial sins might come more naturally to our Catholic instincts, but turning the other cheek might save our economic souls.

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