Monday, November 23, 2009

The Debtor's Prison of Today

Imagine yourself as a farmer in the early 1800s. You probably own a 40-acre farm with a 1/2 dozen milking cows, a few heifers, a team of horses and some crops in the field. You’re a farmer. Unlike today where you get your guaranteed-to-germinate seed from Monsanto in 1840 it was a hit or miss situation. A few years of bad harvests, animal disease and you find yourself in debt. Your creditors come after you for payment and after a while a few persistent ones get a judgment against you. The judge orders you to pay. They liquidate all your possessions, but there is still money owed. You and your entire immediate family are put in a jail. In some cases they would keep you in the jail until your debt was satisfied.(1)

The jails were dirty being nothing more than large rooms broken into cells with steel bars to keep the debtors in. Disease was rampant and typhoid was known to spread from person to person. Many times more than one family lived together in a cell. They would let family members go out to work and then return every night until the bill was paid. The local court or town would put up markers to delineate how far away from the jail a debtor could go to get a job to pay off their debts. Any farther away and they would be charged with escape. Those with large debts could be living in debtor’s prison for years. Sometimes only the head of the household was imprisoned leaving the rest of the family to satisfy the debt. The family would also be limited in their travels.(2)

Until the mid 1800s a person could be jailed in the US for failing to pay off debts, fines and even taxes. Many times you were not only expected to liquidate the debt to get out of jail but also to pay for the cost of your imprisonment.(3) Originally, the whole idea of a debtor's prison was to encourage repayment of the debt as quickly as possible. Imprisoning people was incentive enough however many simply did not have the skills to take care of the situation. Debtor’s prisons were legal in the US until 1833 when the government passed laws to end the practice.(4)

Most would say that today debtor’s prisons no longer exist. You cannot be jailed because you owe money on your JC Penny charge card or that you are 3 months behind with the pool guy. They just don’t treat debt that way any more. The only way you can be imprisoned for a debt is if involves certain types of fraud, alimony, or child support. Otherwise there are bankruptcy laws and reorganization programs to take care of debt. However, this is starting to change.

Just recently a judge “in Southern Indiana, decided that debtors’ prison needed a comeback. In one case Herman Button, who owed $1,800 to a former landlord but had no assets or income beyond social security, was summoned to court where a … judge threatened him with contempt and imprisonment if he did not pay.”(5) Although a higher court overturned Button’s imprisonment the precedent has been set. Additionally, just as in the past where not only would you have to serve and pay off your debt many prisons are charging prisoners for room and board.(6)

I am not worried about the debtor’s prison of the past coming back into vogue. The idea of going to jail in our modern society is not very reasonable. There would be no way to obtain satisfaction on the debt. Debtor’s prisons today are more much more insidious. There are no bars on the windows or jailer’s keys to unlock the door and yet we find ourselves locked in today more than ever. And although the signs are no longer there at the edge of town to draw a line in the sand there are walls now which lock us in and we can’t see. Today our credit scores limit us. They control the types of loans we can acquire and the interest rate we are locked into if we successfully get a loan. Many will say that this is our own fault, that we are the masters of our credit score. This is a true statement in many cases, however there are those who have befallen on hard times because of no fault of their own.

How many of us have gone for a car loan and heard the salesman say something like, “Listen, the payment seems a little high now, but remember you’ll be getting a raise in the future and today’s dollars won’t be worth the same in the future.” To many the logic was there. In the 1940s my father worked for about $35 a week and could feed a family of three, own a used car and pay rent on an apartment. What’s $35 today? Lunch for two. A sale was made and a car was bought on the promise of the future. But how fast things could change with the loss of a job, or with a prolonged illness or hospitalization and the debt rises fast. The only loser is the debtor. The car dealer and the salesman were paid. The bank will eventually get its money back through repossession of the car and the forced repayment of the debt. The only options for the debtor are repayment or bankruptcy.

This is the situation with student loans. Men and women of all ages decided to go back to school with the promise of a better future. Certainly in our society the higher your education the better your chances of a better life. The “good times” would have been limited to the wealthy if it was not for the federal and state student loan programs and the compliment of private student loans. Many of those who took loans out were following the logic of the used car salesman. Student borrowers, because of their lack of experience about finances and interest rates, were taken advantage of by the banks that will always get their money. The colleges had great degree programs that are expensive but have the promise of a fantastic life if you succeed. Banks with the help of the federal governments willingly gave out money telling their borrowers not to worry. Students/debtors would have to repay but once they got their fabulous job because of finishing their degree, the loan repayments will be negligible over time.

It all works until there are bad economic times. Just as with the car owner, the student is the only one who will get hurt. The difference is the banks can’t repossess the degree, but they can put you in a virtual debtor’s prison. (At least it’s virtual for now.) If the student defaults on his loans, the universities have already been paid. Whatever portion of the loan isn’t guaranteed by the federal government, the banks will force the student to repay over time. While the repayment is occurring the student is branded with their credit score. It locks them into a life of sub-standard housing and transit. In some places mass transit is non-existent and good personal transportation almost impossible. Then there is the situation of a student that hasn’t finished their degree but cannot get a loan because of their credit score. Because of this the banks ensure repayment regardless of the hardship the debtor is going through or the suffering of their family. These are not people who were greedy trying to have physical possessions but went on a journey to better themselves and those around them.

The current economic situation has collapsed academia in significant ways. Some colleges are cutting back on classes, which means fewer professors hired and fewer students attending because of lack of loans. Graduates are finding themselves with fewer job prospects but with the debt of school hanging over their head. Even if they get a job, it may not be in their field or the salary has been reduced for new hires. Unfortunately, the cost of living continues to rise without any relief in sight. At times graduates can find work to live on but not to cover the school loans. They find their credit scores not just keeping them out of the housing market, but out of the running to rent decent apartments. The problems are starting to compile. If the situation continues you will see bankruptcies in the student population rising. Even though the school loans can’t be discharged they will cause students to default on the others. The worst-case scenario would be a large educated disaffected class of people who are without work and in debt with nothing to lose. They’re in debtor’s prison and may be there for years.

1) Michael Pollick, “What is Debtor’s Prison?” Wisegeek, what-is-debtors-prison.htm (assessed November 19, 2009).
3)MyVesta US, “History of Credit and Debt,” MyVesta US, history_debtorprison.html (assessed November 10, 2009).
4) Pollick, “What is Debtor’s Prison?”
5) Marlys Harris, “Could Debtors’ Prison Make a Comeback?”, (assessed November 11, 2009).
6) Ibid.