The Morality of Debt

Great Debates
1

[Inspired by this: What do you think of lenders pursuing deficiency judgments against defaulting homeowners? - Great Debates - Straight Dope Message Board ]

I’ve been thinking about the morality of debt, lately, and came to two conclusions.

First, having taken on debt, you are morally obligated to pay it back if you can. That is, if you can avoid bankruptcy, you should, and should pay back all that you owe.

Second, this is better for society as a whole, not merely the creditor.

There is a reason for this. I’ve seen some here, particularly but not limited to liberals (and perhaps that’s simply the board’s popualtion itself speaking) who talk about debt as a legal instrument. In this view, a loan is nothing more than what the law requires at a flat minimum, and you’d be well advised to use the law in any advantageous way.

First off, to me this smacks of rules-lawyering life. Rules lawyers are not well respected in any field, and for good reason: they try to get an advantage for themselves at the cost of making the group function less well. And the group will function less well. It’s true that I sign a legal contract to get a loan, but I also make a promise, and that promise has real value if I am a man of honor. It’s not the law which really compels repayment so much as the custom that people repay their debts.

Moreovr, we can look at what happens to a society when cheating on debts and screwing others on loans becomes common. This society has a name: Memphis, Tennessee. The bankruptcy rate in Memphis is just a tad high.

http://www.usatoday.com/money/economy/2007-07-20-487927626_x.htm

Not the best link, but it does explain the sky-high bankruptcy rate there. It’s so great that it skews the results for the whole of Tennessee.

And this has real consequences. Sure, it’s all legal. But it makes credit hard to get, makes lenders uneasy, and raises prices in many areas. In fact, overall it ay be a serious drain on society as a whole and quite probably makes the majority of Memphis-ians poorer. Investing in Memphis becomes a bad idea, and potential investors stay away from any field which could be affected by bankruptcy.

Therefore, when I make a promise, I ought to keep that promise, even if it is to a faceless bank. If I have been defrauded, I can to bring that fraud to the attention of authorities, but otherwise must repay even a foolish investment if I can.

2

Does this morality apply only to individuals, or also to businesses? How many times have you heard about a given business ceasing to trade, either totally abandoning debt or paying pennies in the pound, only for the exact same people to then immediately start a purportedly new business, now conveniently free of debts.
For individuals, I believe they should abide by the details of any contracts they enter in to. If, in the case of a mortgage, this states you keep up your payments or forfeit the asset (house), then I do not believe it is immoral to cause this clause to be invoked. If the lender didn’t want to assume the risk, they would have included clauses making the borrower liable for any shortfall.

3

It looks to me like a basic case of competing moral philosophies. If one believes that the only guiding moral principle is “rational self interest” or some such, then it will often make sense for an individual to take on debt which he has little or no hope of repaying. If that individual is involved in running a business or a government, he may well have the chance to do so on a large scale.

Contrawise, if one believes that we all have a moral obligation to make all decisions including financial ones with a view towards what’s beneficial for our fellow human beings as well as ourselves, then it would follow naturally that one shouldn’t take out a loan without intention to repay. This, of course, would not rule out situations where job loss, medical problems, natural disaster, or something else unforeseen gets in the way of repaying, but it would lay down a basic guideline.

4

Debt is a deal made between two people (or entities) which should benefit both. There is no moral issue involved. You are suggesting that humans and businesses should use different rules in reading a contract and that the humans should the most restricted.

The article you link is interesting in that it tries to link religious morality with a willingness to repay debt but then it also points out that this supposedly religious area has unusually high divorce rates and gambling problems. Maybe morality and business aren’t related at all.

5

I have no problem with the proper use of bankruptcy - to recognize that in some cases, repayment isn’t an option, and society is best off acknowledging that and allowing people to get fresh starts. Business or private individual, the rules do not, and should not, matter (aside from purely technical details).

If a given business cannot pay, then it can be broken up, declare bankruptcy, whatever - and I have no problem if the individuals then start something new. Matter of fact, I don’t even see how this applies, since it’s rarely legal to loot your own business and stiff creditors.

That’s the attitude I dislike, aprticulrly because I think you’re talking about people trying to walk away from underwater mortgages. The penalty is a backstop, a hedge against risk, and we as a group as far better off paying than not paying. You’re only screwed if you yourself did something very, very stupid and pretended your house was an appreciating asset.

6

I’d like to hear what you think about rich businessmen or corporations who happily renege on debts to save their wealth. Such behavior is more the rule than the exception, but Donald Trump is especially well known for this. I’ll cite only with the very first Google hit:

http://www.legalzoom.com/legal-headlines/celebrity-lawsuits/how-does-trump-repeatedly-file

I’m not interested in hearing that Trump’s behavior is “legal.” It is OP that focuses on “morality.”

Or are our magnanimous Job Creators subject to a less stringent morality than ordinary citizens?

7

Hey, there’s a thread in GQ where you imperiously stated you knew better than everybody what the definition of a loan is. How about you return to that thread and answer my question before starting new threads about loans?:rolleyes:

8

Number 1: You seem to be imputing to me. I would caution you about how far you take this line of argument, in that it in no way, shape, or form responds to my point.

Number 2: I see no difference as far as the rules of morality. Did you think I would give another answer? Nor have I ever (in my life, AFAIK) defended Trump or even cared about him at all.

No, I imperiously stated that you evidently didn’t, since you were apparently quite confused on how loans were priced, as well as why people were getting them. (Here’s a hint: people who use their primary residence as an investment vehicle deserve what they get, and usually get what they deserve.)

9

And the only time I’m morally obligated to pay back anything is if I borrow it from a friend or relative or someone who’s unsophisticated. If I borrow from a bank, we both know up front that there’s a possibility I might default or walk away from the loan or declare bankruptcy. The bank is supposed to build in that risk of default into the interest they charge me. There’s nothing immoral about doing something that both parties know is a possibility and have taken into account at the time of making the transaction.

The OP seems to view economics as his own personal morality play, instead of being interested in what works and what doesn’t. And the linked to article is full of unsupported speculation. There’s no reason to make any of the conclusions that are being made in the OP. For all I know, the bankruptcy rate could be high in Memphis because we’re in the middle of a recession rather than because of declining morals or whatever pop-psychology theory is being pushed.

10

Oh, keep digging. You obviously have no idea how to calculate the market value of a loan, which is why you refuse to answer the question posed to you.

If you don’t understand that housing is an investment, then you have no business lecturing people about economics.:rolleyes:

11

If think it’s funny. You keep pretending that I don’t know what a loan is, and yet when asked repeatedly to explain what you think is the proper way to calculate the market value of a loan, you duck the question over and over again. You never actually put forth an actual economics argument in these threads. All you do is tell us how certain people are bad or stupid or whatever. If you don’t want to make economics arguments, then why do you keep pretending that’s what you are trying to do?

12

Why do you have a higher moral burden to repay a debt than the legal burden that your creditor may seek to apply to the transaction?

In other words, the contract may direct that you are obligated to do a, b, and c if you stop paying the loan for any reason. The creditor accepts the risk that you simply may not want to continue with the contract. You seem to want to ignore that concession and say, “I will see this contract through no matter what happens!!!” If your creditor is giving you preferential terms, where is the moral harm in accepting what they are offering?

Moreover, why does this approach not apply to other contracts? You have agreed to work for your boss, but if you are offered a better job, you’d almost certainly be free to accept that offer. But why are you not morally obligated to continue with your current job until you retire or are let go?

13

Or, try Mrs. McArdle, and this is hardly the only article she’s written on bankruptcy.

Since you evidently didn’t bother to research your accusations or allegations (no surprise there :rolleyes: ), here’s a few more tidbits. Neither Memphis’ bankruptcy rate, nor its problems, are recent. They go back well over a decade.

That, of course, is merely one author but I trust it makes my point.

Epic Fail. Do you honestly think that housing stock, on average, is a good investment? That is is likely to appreciate barring a lucky market? Or that it in any way represents a wise use of investable money, as opposed to simply being a stupid way to buy more house than you should?

Housing stock isn’t an investment, in that it in no, way, shape, or form offers anything like an investment. It does not naturally appreciate, it does not offer an income stream unless you rent it, and is not easily converted back to cash without a hot market. It isn’t an investment, and no amount of blind assertion to the contrary changes its financial characteristics.

I stopped responding to you because you made weird and wild claims about the nature of loans, to the point of asserting that the loan price should change based on the current price of the house, which is nonsensical and financial madness. I also saw it was no use talking to you on the subject, and I’d kindly thank you to stop hijacking a more useful thread.

14

Yes. Many loans, both business and consumer, are structured to have simple asset forfeitures on default.

:confused: :confused: :confused:
Many many business loans are structured as I described; I mentioned Trump’s behavior simply for a well-known example.

Perhaps I should wait till BBQ Pit to “impute to you”, but it is quite clear to me, reading between the lines and noting your failure to even respond to my point except with a vague deprecation of Trump, that either you are grossly misinformed about business debt or you indeed hold Joe Citizen to a higher standard than you apply to “magnanimous Job Creators.”

15

I hope we’re fighting your ignorance about business debt.

What you need to do, if you want me to stop “imputing to you” is to express the same sort of outrage against business trickery and defaults as you are happy to express against (often deceived) homebuyers.

(But I won’t hold my breath.)

16

bandit:

Say I sign a contract with a cell phone carrier. $10 a month, unlimited everything, fantastic touch screen phone with internet and blowjobs, for two years. The contract includes a clause to the effect that the carrier may change the terms of the agreement at any time, provided they give me 45 days advance written notice of the change, at which point I have the option to cancel the contract and walk away.

Six months in, the financial people at the carrier discover that they’re going to go completely broke if they only keep charging people a measly ten bucks a month. They want to raise the price to $20, just to break even.

Doe the carrier have a moral obligation to continue to provide their service to me at $10/month?

17

Because the law is an ass.

I have an opportunity to rob widows and orphans of their life savings. I wind up with $100 million in assets. Then I get caught, and I have to pay a $10 million fine and spend six months in federal prison.

Are you saying that I have completely discharged my moral responsibilities by paying the fine and doing the time? After I do that, I am morally in the clear?

Regards,
Shodan

18

(I get the impression there’s some backstory or subtext behind this thread, and that some people are responding to posters’ history and not just to what they’re saying here. However, I’m just going to take everything at face value and respond to this thread itself.)

I dunno; this sounds a but like saying “There’s nothing immoral about shoplifting, because the store knows it’s a possibility and is supposed to build in that risk in the prices it charges.”

It’s not quite the same thing, because some of the people who default on debt do so, not flagrantly and deliberately, but despite their best intentions to pay back the loan.

Well I, personally, believe I have a moral obligation to pay back any money I borrow if at all possible, and not to borrow it in the first place if I don’t believe I’ll be able to pay it back, whether I’m borrowing from a private individual or from a bank.

And I believe that the country would be in better financial shape if everybody felt this way, and that some (though not all) of the people who are currently struggling with credit card debt, houses/cars they can’t pay off, etc. wouldn’t be in the mess they’re in.

19

Do you have a contract with the people that you would be robbing?

ETA: And you’d probably get 45 years in jail, not six months, for stealing $100 million. So much for your silly hypothetical, eh?
http://www.mercurynews.com/breaking-news/ci_18985196

20

When people (most noticeably, but not exclusively the right) start talking about morality from lenders, and how they should voluntarily forgo profits in exchange for helping those in need, then we can start talking of the moral obligation of the borrower to act outside the terms of the agreement.

Right now it seems like the typical one way street.