Debt and the Changing Morality of Paying What You Owe

People who refuse to make good on their credit card payments or other debts actually have a name — “ruthless defaulters” — and their numbers are likely to grow as more consumers find themselves overwhelmed by bills, according to David Streitfeld’s piece in The New York Times Sunday, which getting a lot of attention in the blogosphere.

They are upset — at the unyielding banks and often at their free-spending selves — and are pre-emptively defaulting. They could continue to pay for a while longer but instead are walking away. “You reach a point where you embrace the darkness of default,” said Adam Levin, chairman of the financial products Web site Credit.com.

Along those lines, I keep hearing radio ads for consumer credit counseling firms that have a different tone than in the past. Companies that negotiate down debts with credit card firms on behalf of consumers once touted themselves as a helping hand for a troubled borrower drowning in debt. The ads would sympathize with the worries of a consumer saddled with bills, and offer to help lift that burden. The latest ads, however, complain about lenders getting billions of dollars in taxpayer bailout money — and they suggest that lenders are somehow obligated to reduce consumer debt. The tone has changed significantly. The ads now say consumers deserve to be bailed out by these bailed out institutions. There’s no hint of the personal responsibility involved in piling up a mountain of debt.

Is this a good thing? Are banks getting what they deserve for overextending credit? I don’t think it’s as simple as that. Here’s the borrower in Streitfeld’s story, explaining her reasoning for defaulting:

Melissa Birks is being stalked. Her cellphone keeps ringing, always from a caller marked “unknown.” She says she knows it is her credit card company wondering why she stopped making payments. Ms. Birks, who owes $28,830, has nothing to say.

Ms. Birks, 43, readily admits that no one forced her to use her cards. “Some people are good with money,” she said. “I was stupid.”

Still, just about everyone made mistakes during the boom — regulators, Congress, Wall Street. If Bank of America got a bailout for making bad loans, Ms. Birks figured, she deserved a bailout for accepting them.

In previous downturns, Ms. Birks’ only recourse would have been a debt management plan, where she would restructure her payments with the help of a counselor, or bankruptcy. Now there is a third option: debt settlement. This means going on strike until the lender accepts a partial payment.

Ms. Birks asked Bank of America about a settlement this spring. Since her account was up to date, she was told she didn’t qualify. She stopped paying, the bank started calling.

When Bank of America finally got her on the phone, it agreed for the first time to drastically reduce her interest rate. She did not take the deal, but considered it progress.

Neither side comes out of this looking good.

Calculated Risk, citing Streitfeld’s piece, wonders once again why financial literacy isn’t being emphasized more these days:

Streitfeld is writing about the growing wave of ruthless credit card defaults, but this also raises question about the credit card industry in general. Why aren’t consumers being educated on the dangers of not paying off their credit card balance each month? Maybe that will be a good role for the new consumer financial protection agency.

But it’s not a given that agency will be created. And even if it is, it may be too late for people like Melissa Birks, debtors who refuse to answer calls from banks  about the thousands of dollars they owe. Until there’s some sort of consensus reached on the responsibilities of both consumers and banks to settle debts in a post-bailout world, the new morality of mounting consumer debt may become the option of the ruthless default.