As someone who smoked the credit crack pipe during the boom years and then kicked the habit by declaring bankruptcy to start afresh, I observe with the interest, and no small amount of bewilderment, at how the UK personal debt crisis continues to rumble on, showing little or no sign of improving.
The reason for my baffled state is the seeming reluctance of consumers to face up to reality and recognise that default is not only a viable and entirely rational solution to freeing themselves from debt, but that it is also a necessary part of the cycle: we have seen a debt bubble grow and then burst spectacularly and the next natural step in such circumstances (more familiarly at the macro level) is a large wave of insolvencies as economies re-set or deleverage. So, in the current post-crash situation where there has also been a debt bubble at the micro level, the time has come for individual debtors to re-set their personal finances and deleverage, for their own benefit and that of the wider economy.
As a result of the easy credit era, the UK has one of the highest levels of personal debt in the world and this unprecedented level of household or consumer debt is playing a significant, but barely acknowledged, role in preventing the UK economy from recovering due to the inability of its ‘consumers’ to spend. Personal debt is actually increasing rather than falling and so clearly we’re not travelling in the right direction. Niels Jensen over at creditwritedowns.com nails this one brilliantly:
“the UK has not yet got its debt crisis under control…most of Britain’s debt problems originate from households and banks both of which have done little so far to address the problem. Unlike in the United States where households have been deleveraging – to a large degree through personal bankruptcies – UK households have not reduced debt levels at all, mainly because banks have been relatively lenient, granting forbearance to troubled borrowers where perhaps foreclosure would have been a more sensible strategy.”
So, how to fix things? Well, there are two options available to debtors to rid themselves of debt: either (i.) the long process of repayment, or (ii.) the far speedier and more certain solution of default.
The problem with the repayment option is the size of the debt bubble and the amount of debt that people are carrying – it is unmanageable and totally unrealistic to expect it all to be paid off, particularly in a recessionary (or at best stagnating) economy. Thankfully Professor Steve Keen of debtdeflation.com is on hand to point the way out of this predicament: “The only real question we face is not whether we should or should not repay this debt, but how are we going to go about not repaying it?”
So when will UK debtors follow their US counterparts and embrace deleveraging in order to get rid of all that unmanageable debt? And what’s stopping them.
Barriers to Default
As an easy credit bankrupt now enjoying the good life, I struggle to understand people’s reluctance to embrace default,
particularly so in a time of banker bailouts, corporate bankruptcies and sovereign debt crises – default is simply the order of the day. After all, insolvency magics away your unwieldy or restrictive obligations and wipes the slate clean. And in the UK we have the perfect mechanism for this: a quick-fix, streamlined insolvency process designed for a painless procedure which many critics argue is too lenient.
A reasonably significant proportion of UK debtors did embrace default during the credit boom as individual insolvencies began to increase exponentially from around 2003 onwards, with several sharp spikes in the figures, up until last year when they fell back slightly (although still remaining higher than as recently as 2008). But why the slowdown? Why aren’t the figures racing in the other direction with record-breaking numbers scrabbling for the button marked ‘default’ and eliminating all that life-throttling debt?
The truth is that unlike banks or financial institutions, individuals are concerned with the morality of default and/or the stigma of insolvency. They are also concerned about losing their homes and future credit worthiness.
Firstly, as both I and the proponents of strategic default have said many times before, financial decisions should only ever be based on cold, rational economic factors and emotions, morality and social factors should not figure at all. In short, individuals should behave more like banks when making such decisions. My suggestion to individual debtors is to imagine themselves as a company that has too much debt and consequently little room for manoeuvre – yet you know that by entering some form of insolvency proceedings you can endure some short-term pain but with the result of a new, unburdened, more dynamic company emerging on the other side; imagine a more dynamic, unburdened self…
Turning to the dilemma of those confronted with losing their homes, or who are concerned about future borrowing, a decision has to be made: struggle on and endure years of hardship in the hope that you pull through in an uncertain climate marked by falling wages and rising unemployment, or face up to reality and cut your losses to enjoy a more certain and less fettered immediate future.
It is clear that we have a situation where the inevitable is being put off and delayed – something that has been a feature of the financial crisis at all levels – with only those 100,000 or so (per annum) UK defaulters being the exceptions.
Above all, individuals need to remember how capitalism functions: bust follows boom in the cycle and therefore default is currently expected of you. In fact, it is required of you, as the western consumer economies are predicated on people continuing to spend and consume and while you remain hamstrung by debt you cannot fulfil your duty as a card-carrying member of a consumer society.
Of course, people will oppose a call to default on the grounds that mass default would do more harm than good to the wider economy, but then such actions could have the positive benefit of forcing policy makers to implement more effective solutions to the debt crisis such as Steve Keen’s modern jubilee.
To conclude, the point I wish to emphasise to individual debtors is that I embraced deleveraging and re-set my personal economy almost overnight. Being free from debt is amazing, unburdened I’m able to do as I please in terms of lifestyle choices and many economic ones too, although obtaining certain forms of credit is an obvious difficulty. Don’t be scared to default, re-set your personal finances and take your life back. You won’t regret it. And remember, default is the right thing to do, both for you as an individual and for your country. Bankrupts are the new patriots.