A clean slate

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This article was published 09/05/2020 (2201 days ago), so information in it may no longer be current.

What would Jesus do? It’s a question long asked by believers regarding moral dilemmas, serving as a north star for their internal compass.

But it just as well might be a question for those seeking an answer to the growing debt problem around the world that’s affecting many households, businesses and governments.

Consider that last month the International Monetary Fund Fiscal Monitor raised concerns about rising debt levels among all nations.

Closer to home, MNP numbers from its consumer debt index found that in March, about half of Canadians surveyed stated they were on the brink of insolvency.

In April, deficit projections from the parliamentary budget officer show the federal government will run a deficit that exceeds $250 billion this year. That’s not even accounting for provincial and city finances, which are struggling as well.

Of course, so, too, are businesses, taking on debt often bankrolled by government to stay afloat.

Even before the pandemic, debt levels for government, consumers and business were becoming unmanageable. That brings us back to the original question with an answer, which is undoubtedly Christian (and likely similar for most religions): forgiveness.

Now debt forgiveness may sound like a big slice of dreamy pie in a heavenly sky.

But according to one renowned financial analyst and author Michael Hudson, the notion was top of mind for the Christian messiah.

In fact, the professor of economics at the University of Missouri–Kansas City argues Jesus Christ didn’t die for the sins of humanity. His crucifixion came as a result of calling for debt forgiveness. Specifically, he urged rulers of the day to declare a jubilee, a Judeo tradition of regularly forgiving the indebted. Hudson, writing in a Washington Post op-ed piece in March, put forward the argument that the world should again get behind the idea to deal with the massive debt problem.

Of course, debt forgiveness — and some of the traditions of jubilee — are already part of our modern financial system even without embracing what Hudson suggests.

In Canada and elsewhere, there is insolvency — often a last resort for the deeply indebted individuals, businesses and governments that cannot realistically meet their debt payments. Forgiveness doesn’t come without consequences.

“It sounds fantastic on paper, but we want to caution people that it isn’t a get out of jail free card,” says Monisha Sharma, head of business development at Credit Karma (which provides free credit scores and reports).

She explains that insolvency proceedings generally devastate credit ratings and all but exclude insolvent consumers from accessing new credit and loans for several years.

Still, insolvency, which includes bankruptcy and consumer proposals in Canada, commonly involves the indebted paying creditors a fraction of what is owed, says Brad Milne, a licensed insolvency trustee and senior vice-president at MNP in Brandon.

“There are some instances in bankruptcy where creditors might get two cents on the dollar back, but there may be others where they get 25 or 30 cents on the dollar,” Milne says, adding the amount depends on whether debtors (those owing money) have unprotected assets that can be liquidated.

Those assets may include vehicles and non-registered savings, but pensions and other registered savings for retirement are exempt.

That said, Milne adds, individuals with secured assets would usually not have to declare bankruptcy if they can sell their home, vehicles, and other valuable items to clear up the debt, and therefore, avoid having their credit rating negatively affected for seven years.

By the way, the fact bankruptcy often lasts seven years also stems from the notion of jubilee, which occurred every seven or 49 years (keeping in mind that debt thousands of years ago mostly involved human capital: slaves).

“I think what this illustrates is debt is not a new problem,” Sharma adds. “It’s something we’ve been grappling with for the most of human civilization.”

Bankruptcy has evolved over centuries. The word is thought to come from Roman times, melding bancus (Latin for a bench used for banking) and ruptus (also Latin for broken) — according to a historical summary from BankruptcyDatacom. For hundreds of years, it was a terrible situation for individuals, who were often imprisoned and even put to death.

While much less severe today, bankruptcy is still considered an awful scenario. Fortunately, consumers have other ways to deal with crushing debt.

“The way to think about (debt forgiveness) is there are three options,” Sharma says.

A debt repayment plan generally is the first choice because it involves the fewest consequences, she adds. Debtors typically must repay all they owe, only at a lower, or no, interest rate. When that’s not possible, consumers generally look to a licensed insolvency trustee who, besides providing bankruptcy proceedings, can offer another option, a consumer proposal.

“With a consumer proposal… you’re offering more repayment to your creditors than they would get in a bankruptcy scenario,” Milne says, adding that could be 40 cents on the dollar as opposed to 20 cents. But it involves less time and debts keep control of their assets, unlike bankruptcy in which those are vested with the trustee.

Generally, insolvency is growing in Canada. No data are available for March and April yet from the Office of the Superintendent of Bankruptcy. But insolvencies were up, year over year in February, by nine per cent. That said, bankruptcies have been falling in recent years, as they were in February. But consumer proposals have been growing to offset the falling bankruptcy figures.

Regardless of the kind of insolvency, our debt problems are likely to get worse before they improve as the financial sinkhole from the pandemic grows. The problem is on the radar of government, says economist Parisa Mahboubi, economist and senior policy analyst for the CD Howe Institute.

“In terms of debt… who is going to bear the costs?” says Mahboubi, a member of the think-tank’s crisis working group on household income and credit support that is studying the pandemic’s fallout.

“Debt forgiveness may be something to consider for this crisis because the interest rate is so low,” she says, noting governments are able to borrow at extremely low cost.

But Mahboubi adds this largesse from government comes at a price for future generations.

“Future generations become responsible for those debts of today.”

Then again, keeping businesses and consumers afloat today is vital, too, she says.

“The biggest concern now is to make sure individuals and business suffer less… until the economy starts to reopen.”

Yet even Mahboubi admits that should the pandemic continue for so long that everyone’s balance sheet becomes untenable, perhaps jubilee or similar notions will be on the menu again.

“If we are in a situation where nothing can be done to deal with the debt, then I believe… we may need to think about new ideas to deal with the problem.”