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Walking Away From Debt


Is there a moral obligation to stay?


Walking away is certainly a hot topic. I brought up the issue of walking away on October 2nd 2007 in Mortgage Forgiveness Act - The Seen and Unseen.

The winner in the debt forgiveness provision (if there is a winner) is the struggling homeowner. The unseen loser is the mortgage holder, the NAR and the NAHB. Prior to this legislation a homeowner had to worry about tax liabilities of just handing over the keys and walking away. If debt was forgiven prior to bankruptcy, there was also a tax liability. Such considerations have been removed. At the margin, more people will be tempted than before to hand over the keys and walk away.

Walking away has recently been making the news quite frequently. 60 Minutes did a segment on walking away that I discussed in 60 Minutes Legitimizes Walking Away. Professor Depew explored homeowner decisions in A Business Decision, point number 3 of the January 28th edition of "Five Things".

Ironically, there is now a business called You Walk Away. I discussed the business model of You Walk Away in The Business of Walking Away.

Yesterday, CNN Money was discussing Walking Away, and I picked up on it in Debt Trap Mass Exodus. Here is a small excerpt of my personal thoughts:

If You're Going To Walk, Walk Sooner

Those deep underwater and electing to walk away are simply making a rational decision. For anyone who is going to walk away eventually, they may as well do it sooner rather than later.

There is nothing amoral about walking away no matter what anyone says. The law allows walking away, just as the law allowed banks to ignore the risks and lend to those it should not have

Are moral obligations an issue?

Minyan Avalon writes: "Mish, I'm very disappointed that you don't think people are morally obligated to try to honor their agreements. Just because it's legal doesn't make it right."

Let's explore the issue of moral obligation with a series of questions:

  • Where was the moral obligation of those willing to lend money to someone who they knew could not possibly afford the house?
  • Where was the moral obligation of those willing to lend money to someone when the lender did not care how overpriced the home was?
  • Where was the moral obligation of those willing to lend money to someone when the lender explicitly knew how overpriced the home was?
  • What are the moral obligations homeowners to provide for their family the best legal means they can?
  • Suppose someone could "afford" to make payments but at the expense of say health insurance or better schools? What's the moral obligation on that person?
  • Does moral obligation only run in one direction?
  • Should someone have a moral obligation if he signs a contract with a thief?

A discussion of moral obligations in terms of walking away is not as easy as it might have seemed at first glance. There are many questions but no consensus answers. That's because moral obligations of walking away go far beyond signing on the dotted line. Where people "draw the line" on walking away is going to play a major role in determining the next president of the United States.

No positions in stocks mentioned.
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