At the beginning of 2020, household debt in the U.S. was higher than it had been in years. Nearly 6% of all credit card balances were at least two months in arrears, while delinquencies were being reported for 14% and 16% of car loans and student loans, respectively.
When COVID-19 shut down all non-essential businesses across the country, the number of jobs lost highlighted how many people were living paycheck to paycheck and relying on credit cards and lines of credit to make ends meet.
While the stimulus checks and unemployment insurance have helped, debt levels are still increasing. Consumers are using their credit cards and personal lines of credit to buy groceries, pay rent, or make their monthly mortgage payments. Contractors and small businesses are assuming more debt to pay their rent and staff while receiving little or no revenue. While payment deferrals are providing short-term relief, they will only add to the debt pile after the crisis is over.
This is why some parties are suggesting a solution that is as ancient as it is radical: a debt jubilee.
What is a debt jubilee?
According to author Michael Hudson, debt jubilees were Babylonian practice for over 2,000 years. Each time a new ruler took the throne, the celebrations included a debt jubilee that wiped out every person’s debt. This included:
- Forgiving personal agrarian debts held by small landholders. (Business owners remained liable for mercantile debts.)
- Liberating bond servants (those who had been obligated to work off their debts) and allowing them to return home.
- Returning land that had been forfeited due to debt arrears.
Not only did such a move make that monarch more popular, but it also left citizens with more money to pay the new taxes and support their families while they served in the military and provided free labor on public works projects. This debt forgiveness during each Jubilee Year quickly became common practice in nearly all of the Near Eastern kingdoms.
Would it work today?
The idea that debt across the U.S. could be written off and eliminated is quickly gaining popular support, as it would help reduce the financial burdens that many of us face. Senator Bernie Sanders, in particular, has been highly vocal in his support for all student debt being eliminated.
Most of the press debates over debt jubilees mention student loan debt. The reasoning is that these loans are the only way you can go to school if your parents can’t help or you don’t get a full scholarship. If you then graduate in the middle of a pandemic that shuts most businesses down and triggers a recession, then how can you find a job that lets you start paying off your student loans?
It’s obvious that a debt jubilee would benefit student debtors. By absolving them of their educational loan debts, they will have the financial resources to buy homes, raise families, and pay taxes, which is a good thing for both society and the economy.
Glorious as this sounds, however, it’s not a universal solution. While debtors would benefit from the short-term financial relief, a debt jubilee could bankrupt creditors, banks, insurance companies, and pension funds. Interest rates could shoot up while stocks plummet. What represents salvation to some will mean destruction for others.
If you have more debt than you can manage, then bankruptcy can act like a debt jubilee by stopping the creditor and collection agency harassment and providing relief from unsecured debts like the following:
- Credit cards (credit card debt accounts for a huge percentage of consumer debt today)
- Medical bills (every year, thousands of people who are uninsured or have inadequate insurance struggle to stay afloat financially after a serious illness)
- Personal loans and lines of credit
- Cell phone bills
While you generally cannot discharge student loan debt, income taxes, and child support arrears in a Chapter 7 filing, getting rid of your unsecured debt can leave you with more money to apply to these obligations. If you have a steady and reliable income, then you may be able to repay them over three to five years in a Chapter 13 filing.
A New York bankruptcy attorney can help you determine whether you qualify for Chapter 7 and show you how to make the most of this opportunity to start over. With few exceptions, this form of bankruptcy is over in a matter of months, and many consumers report being able to buy a home within a few years after discharge.
As the recent pandemic has shown, a financial crisis can strike anyone, and the bankruptcy system is there to give you a second chance. Instead of waiting for a possible debt jubilee, make an appointment with a bankruptcy attorney to go over your options and help you make the right decision.