We all know that debt distress exists; the rising cost of living combined with stagnating incomes seems to have made it inevitable. Yet we struggle to look at bankruptcy up close. It’s about time that changed.
Knowledge of insolvency and bankruptcy remains poor. I am often reminded of Michael Scott in the popular sitcom The Office, who faces serious financial difficulties and is advised to declare bankruptcy. He takes the advice literally, walking into the middle of the office floor and yelling “I declare bankruptcy!” When a colleague points out that you can’t simply say you’re bankrupt and have it be so, Michael retorts that he didn’t say it, he “declared it”. We laugh at this scene, but the truth is that most people do not know much more than Michael does about the process. There remains a halo of shame and secrecy, partly because of the superstitious belief that if we learn about insolvency that we will somehow invite bad financial luck. We tend not to make wills for similar reasons, often with disastrous results.
A century ago, people borrowed primarily to purchase luxury goods out of their price range, but now you can finance a pizza for as little as £5 a month. Relative to the levels of inflation, incomes are either stagnant or even falling as the price of goods and services grows every quarter. This has led to a predictable increase in the number of bankruptcies, but somewhat paradoxically, fewer people go bankrupt than we would expect going by the figures. Many debtors now reside in what the debt literature (somewhat unfortunately) calls the ‘sweatbox’ where people continue to service their debts even though repayment is hopeless – and bankruptcy is inevitable.
The superstitious refusal to reckon with insolvency and bankruptcy has created a predatory industry selling miracle cures through Debt Management Plans (DMPs). Some people can profit by these plans (especially if they restructure debt) but often the only beneficiaries are creditors and the companies who arrange and organise the plan – naturally they take fees for the service they provide. Debt crisis was once feared and hated by creditors, but now even financial distress has been subsumed into the logic of financialisation with the unending collection of fees and interest taking priority over full repayment. In an ideal world, we would never repay the principal and simply go on paying interest until we died.
Naturally bankruptcy puts a stop to this, but is also the one option most people will not consider.
This is what I mean when I say going bankrupt is hard work, as I explain in my book Thriving Beyond Debt. The actual bankruptcy process is a relatively speedy affair and you will be discharged in 12 months or less. The most significant obstacle remains the £680 fee, which has created the absurd paradox of debtors too poor to go bankrupt. The fear of the process combined with rising financial distress means that debtors are spending inordinate amounts of time in the sweatbox. A couple whose house was in negative equity participated in my research. By the time they finally went bankrupt, they had sold their bed frame, radio, television, car and books. The only things they did not pawn were their children’s toys, something the creditor criticised them for – the hunger of interest knows no limits.
It is more a moral process than a financial one. Across a range of countries there are gatekeepers (judges, insolvency practitioners, court officials) who will evaluate whether you have really tried to pay your debts. By the time most people get to meet such a gatekeeper they are in such a poor financial state that it is their deservingness that is being appraised rather than their finances. This can be humiliating for the debtor, as their behaviour and mistakes are brought out into the open, serving as yet another obstacle to applicants.
If we take market logic at face value, then the only serious response to these obstacles is to remove the impediments to bankruptcy. The policy belief that debt relief is transactional is entirely false, and in fact people spend even longer in the sweatbox when they believe that it is simply a transaction. Restoring debtors to solvency enables them to participate in the market more effectively as consumers because debtors spend a significant amount of their income servicing their debts. Student debt, for example, represents a drag on the economy, as graduates spend the crucial opening years of their working lives servicing debts that may be unpayable. The highest known amount is £231,000, raising the question of whether this money can ever be paid back. Such conversations always invite wailing and gnashing of teeth about fairness and moral hazard (taking a risk while knowing someone else will bear the costs associated with that risk). Yet our current ‘solutions’ represent nothing more than jogging on the spot, condemning people to years of hardship and poverty to satisfy our moral sense of justice that people who do not pay their debts deserve to suffer. We need a more administrative process involving fewer gatekeepers and more empathy, otherwise we condemn a generation of student debtors to misery.
Regardless of how we proceed, one thing remains clear: we can only make progress by reckoning with debt and the impact it continues to have on our culture and society.
Zach Roche is Assistant Lecturer in Management Studies at the South East Technological University.
Thriving Beyond Debt by Zach Roche is available on the Bristol University Press website. Order the book here for £80.00 or the EPUB for £27.99.
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