Debt - A National Problem
During the second quarter of 2011, the total value of outstanding student loan debt surpassed the total amount of credit card debt carried by Americans. [i]
The topic made it into President Barack Obama’s 2012 State of the Union Address. Over 1 in 4 homes is underwater nationwide [ii] ; 47% of homes in the City of Chicago are underwater. [iii] As of November 2011, the U.S. Department of Labor’s Bureau of Labor Statistics pegged the unemployment rate at 8.6%. [iv] With so many people unemployed and underemployed, it is no wonder that many of us are facing an ever-growing mountain of debts. When corporations get into financial trouble, they ask Washington for a bail out or they enter into a Chapter 11 bankruptcy, a process which allows a corporation to reorganize its debts, repay its creditors over time, and emerge in a stronger, more viable condition. Companies that successfully reorganize walk away from bad investments to profit another day.
So why don’t more consumers walk away from bad debts? For innumerable reasons, our national psyche is ingrained with a moral theory of contracts. Based upon this theory, those who do not honor their debts are “bad people.” We generally use terms like deadbeat and loser to define these people. Yet when a corporation emerges from a Chapter 11 filing, the financial press praises the corporation’s management for turning things around. The same managers are often rewarded with large bonuses and an increase in their stock price. General Motors is a great example. In 2009, this icon of American ingenuity was on the brink of disaster. With the help of the federal government as a debtor-in-possession lender, General Motors successfully reorganized, innovated, and emerged from bankruptcy as the world’s number one automaker by 2012.
Aren’t we missing the bigger picture? If we were all informed, and were aware of our rights, then we could all emerge from a bad financial situation and succeed. Politicians, performers, billionaires, and others have filed for bankruptcy or used the other protections outlined within these pages and thrived. Plenty of educated, well-informed people have sought protection under state and federal law and prevailed. This is why consumer defense is the luxury of the informed. The U.S. Bankruptcy Code’s stated purpose is to give the honest yet unfortunate debtor a fresh start. Everyone is entitled to equal protection under the law; having the information to exercise your rights tactically and purposefully is invaluable. What prevents most people from making sound financial decisions is that they are unaware of the true impact that debt has on long-term financial security.
[i] Cauchon, Dennis, “Student loans outstanding will exceed $1 Trillion this year,” October 25, 2011, available at: http://www.usatoday.com/money/perfi/college/story/2011-10-19/student-loan-debt/50818676/1 (last visited January 3, 2012).
[ii] Humphries, Stan, “No Respite From Housing Recession In First Quarter,” May 8, 2011, available at: http://www.zillow.com/blog/research/2011/05/08/no-respite-from-housing-recession-in-first-quarter/ (last visited January 3, 2012).
[iii] Guzzardi, Will, “Chicago Mortgage Crisis: Nearly Half Of Borrowing Homeowners Are Underwater, Says New Report,” May 10, 2011 (updated July 10, 2011), available at: http://www.huffingtonpost.com/2011/05/10/chicago-mortgage-crisis-n_n_860068.html (last visited January 3, 2012).
[iv] U.S. Department of Labor, “Economic News Release,” December 2, 2011, available at: http://www.bls.gov/news.release/empsit.nr0.htm (last visited January 3, 2012).