Do all debts need to be repaid ?

For many, the obvious answer must be yes. It’s a self-evident truth.

It is what we are taught from an early age as children: we must pay our debts.  We learn it from our parents, our teachers, our churches, our mosques, and synagogues.  Imagine a world where people didn’t repay their debts.

No-one would want to lend any money. You would only be able to buy a home if you had enough savings; our children would all be grown up by the time we could afford it. The same for cars. There would be less employment, our economy wouldn’t function and there would be less economic growth.

However, the statement, that all debts need to be repaid, is wrong.  It’s a fiction, a lie.

As author, David Graeber, explains in his book, Debt: The first 5,000 years “Financial institutions are supposed to be ways of directing resources toward profitable investments. If a bank were guaranteed to get its money back, plus interest, no matter what it did, the whole system wouldn’t work.”

The simple fact is, it is the non-payment of debts, when people genuinely cannot afford to that makes the system work. It forces lenders to be more careful about who they lend to and in return ensures the level of unmanageable debt in society doesn’t become an unbearable burden for the most vulnerable.

Most financial institutions, like banks and credit card companies, accept this. They understand not every loan or credit card will be repaid. It’s one of the factors they consider when deciding how much interest to charge and who to lend to.

The Can Pay, Won’t Pay Moral Hazard

However, no-one wants to admit this. They say if people were to learn not all debts had to be repaid and there were no consequences, then people would stop paying and the system would break. However, there are consequences.

Society, has created debt recovery laws that allow lenders to recover their debts from those who can pay, but refuse to. This can mean seizing money from bank accounts, repossessing homes or even in the worst cases scenario, making people bankrupt. We also have a strong moral code in our society, that says you must repay your debts and it’s drummed into us from an early age.

Yet, equally, we also have laws that allow people who genuinely cannot repay their debts to get relief from them, using solutions like bankruptcy, Individual Voluntary Arrangements, and Protected Trust Deeds, which are equally as important as the debt recovery laws that allow creditors to get their money back. They ensure lenders are careful about who they lend to, but also gives relief to those suffering from over-indebtedness.  There are still consequences, you still must pay what you can afford for a set period, but at the end there is also debt forgiveness.

It means people are likely to invest their money in financial institutions, because the firm they are trusting their money to are responsible lenders and hopefully won’t throw away their investment. If they do, then people will invest with another firm. As David Graeber says, the objective is to ensure resources are directed towards those firms that are profitable.

The point being, if you are struggling financially, if your debts are high, either because you made poor decisions or suffered a change in circumstances, the moral obligation you feel to pay them can often be misplaced.

At Creditfix we believe when you can repay your debts, you should as it’s incumbent on you legally and morally. However, when you can’t, there are debt relief solutions like those mentioned above that should be considered, with other debt management solutions, to help you address your obligations. These solutions are as fundamental to keeping our society healthy, as are the moral and legal obligations that make you feel you need to repay your debts.

There are few benefits, for any society, if people, for prolonged periods of time, repay all their disposable income over to creditors. It means people have no money to spend in the local economy, such as shops, which other people rely on to keep them in a job, so in turn, they can repay their debts.

The truth is most financial institutions accept this. It’s why the overwhelming majority of our Protected Trust Deed and Individual Voluntary Arrangement proposals are accepted by creditors.  As David Graeber says, otherwise the whole system doesn’t work.

If you are struggling with your debts and want to see if there are other ways to deal with them, why not contact Creditfix and have a chat with one of our advisers on 0808 208 5198 or text ADVICE to 60060

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