Debt is a very confusing topic, mixed up with economics, politics, morality, and religion, not to mention a wide spectrum of emotions from grief and apathy to anger. The book Debt by David Graeber delves into several of these aspects in his history, and opens for discussion a key question: What role and to what degree should debt have in our lives?
We must pay our debts, or so the saying goes. Furthermore, not paying what we owe is viewed as immoral, akin to theft. After all, should people expect not to have to pay back their debts? Should not they face the consequences of their actions? What of the hardship of the creditor?
Yet, is it not also wrong to insist on repayment of a debt if the debtor is forced from his/her home or cannot feed his/her family? What if the loan was predatory, made knowing that the debtor would default and aimed at reaping the benefits of foreclosure? Even if it wasn’t, should a multi-billion dollar bank insist that people are evicted if they cannot pay a few thousand dollars?
Those that give out loans, such as banks, want to minimize risk, which is perfectly understandable. When something is lent, there is a risk that it might not be returned. If they give out money, banks want to be as sure as possible that they get that money back, along with some profit. Contingencies are set up to ensure that the bank will recover its capital.
A difficult question arises: Should there be limits on how far creditors can go in seeking repayment? For example, is it acceptable to foreclose on a home and evict a family in order to recover the value of the loan?
The purpose of law is to create a level playing field, enforcing a degree of fairness in society. In short, laws are to improve society and when their enforcement results in the opposite, it is time for reform at the very least. The tension between the letter of the law and its spirit applies to debt. Sometimes reclaiming the value of debts is worse for society at large; few people would argue that increased homelessness (to use our example above) is a good thing. If paying back a debt means children going hungry, families on the street, people not getting adequate medical care, then forcing these people to pay their debts is harmful and immoral.
On the other hand, it is also not good for society to have an abundance of debt default. One viewpoint is that if the means that the creditors can use (e.g., foreclosure) are restrained, perhaps fewer risky loans will be granted. Yet, society also benefits from a degree of risky loans (for example, giving those at the bottom of the economic latter a chance to rise above their circumstances). Perhaps the there could be some federal incentives or guarantees to give high risk loans to a certain level, but I will leave that discussion to better minds.
Nevertheless, the agreement is not that risk is only in on the shoulders of creditors. Debtors have to bear some of the repercussions of a default, but the punishment should fit the crime. If they cannot repay a loan, the punishment should not be homelessness and hunger.