The Damage of Debt

"Wealth is evidently not the good we are seeking; for it is merely useful and for the sake of something else."1Table of ContentsI. Introduction 979II . Traditional Constructs of Debt Problems 985III. The Multidimensional Space of Poverty 997IV. An Expanded Framework for Understanding the Harms of Overindebtedness 1003V. Dimensions for Future Empirical Research 1018VI. Conclusion 1022I. IntroductionThe debt burdens of Americans have grown tremendously in recent decades. For most Americans, income in real dollars has stagnated since the 1970s, but both unsecured and secured debt has marched sharply upward.2 About 15% of families spend more than 40% of their after-tax income on debt payments.3 With inflation-adjusted borrowing at a current level more than ten times greater than it was fifty years ago,4 debt permeates the hves of American famihes.A significant proportion of households struggle to manage their debts. In the last decade, on average, more than one million consumer bankruptcy cases were filed annually.5 To put that number in context, one million bankruptcy cases means that, in 2012, more women will go bankrupt than will divorce, and the annual number of freshly minted bankruptcy debtors will exceed the number of new college graduates.6 And the bankrupt are only a small subset of those struggling with debts.7 In 2006, one in seven families was contacted by a debt collector.8 The foreclosure crisis and the recession have only expanded the number of people strugghng with debts. In 2010, more than one in eight Americans was behind in their mortgage payments or in foreclosure.9 Millions more have negative equity in their homes, with mortgage debts overwhelming their homes' values.10 The exploding debt loads of American families have increased the phenomenon of unmanageable debt.Most efforts to study the financial distress of debt burdens focus on the bankrupt population.11 People who file for bankruptcy admit financial collapse, making a pubhc declaration that they cannot pay their debts and that they need relief. Researchers and policymakers have decried the balance sheets of these bankrupt households. In 2007, the median bankrupt household owed nearly $34,000 in unsecured debt,12 an amount equal to nearly fifteen months of its income.13 Although debts have increased in the last two decades, an enduring characteristic of bankrupt families is that their debts dwarf their income and assets.14 Policy debates about consumer credit have seized on the bankruptcy data as evidence of the high levels of indebtedness in America.The debt metric pervades bankruptcy lawmaking. The means test added to bankruptcy law in 2005 calculates whether a household could repay a certain fraction of its debts to determine whether a household deserves a Chapter 7 bankruptcy discharge.15 The cost of bankruptcy to creditors is measured by dollars of debt discharged.16 Bankruptcy's success or failure is measured by the fraction of debtors that achieve a discharge of debt,17 and generosity of the system is quantified by the types of debt deemed ineligible for discharge.18 In the bankruptcy and consumer protection context, the conceptual space of financial distress has been defined along a single dimension: debt, or its kissing cousin, wealth. The problem of overindebtedness occurs when consumers' debts exceed certain financial benchmarks. Negative net worth, high debt-to-income ratios, or heavy debt service burdens all capture when debts overwhelm assets or when debt is unlikely to be serviceable on current and expected income.19 Although these measures are more likely to capture situations when debt is imposing harms than simply tallying dollars of debt, all financial metrics are limited in thenusefulness to measure the cognate harms of overindebtedness. …