Between Life and Death, Bankruptcy Style
The Brits, in their understated way, are on the fast track to revolutionizing the balance between debtors and creditors. With no public fanfare, the Ministry of Justice announced a plan for debtors to stop making payments on credit cards for up to a year if they had a change in circumstances, such as a job loss or divorce. (BTW, job loss, medical problems and family break up are involved in 90% of US bankruptcies.) In effect, the debtor can stand somewhere between regular repayment and bankruptcy, getting the automatic stay, but not the discharge.
There are no reports of mass heart attacks by lenders, no threats to halt all consumer lending, and no reported plague of locusts.
During the time the debtor has the one-year stay in effect, interest will accrue, but not at penalty rates. The debtor will have to show that he/she will be likely to resume payments at the end of the year.
Britain is considering a place in between regular repayment and bankruptcy--a cessation in payments based on changed circumstances. There is some court intervention and some fact finding, but because there is no discharge, the intensity of the inquiry may be considerably less than there might be in a typical bankruptcy.
This move raises an interesting empirical question: If debtors have a not-quite-bankrupt option, will total payments go up? If they can suspend payments, but not get hit with ruinous penalty fees and penalty rates of interest, can they eventually pay off their credit cards? If they can quit paying for a while, will they be able to stay current on home mortgages and car loans?
To ask these questions is a reminder that the world we often describe as debtor versus creditor is, in fact, often creditor versus creditor. Suspension of payment to one group of creditors may help another. In fact, in some cases, it may mean more payments for everyone.
If the British give consumers this option, the debt paradigm around the world shifts just a little. No longer will Americans be leading the way on how to think about financial death and rebirth. Instead, the new paradigm may be to think about how to help a debtor avoid death altogether.