LAWRENCE — When it comes to debt and bankruptcy, some things never change. While people are no longer imprisoned for failing to pay their debts as England did a century ago, a new article by a University of Kansas law professor shows that the key arguments about enforcing debts or relieving them in bankruptcy have changed very little since then.
Stephen Ware, professor of law, has authored “A 20th Century Debate About Imprisonment for Debt,” which explores the parliamentary debate in England circa 1909 about whether to continue imprisoning debtors and notes how current debates about consumer debt in the United States rest on some very similar arguments. The article will be published by the American Journal of Legal History.
“Many people who settled in the 13 colonies that became the United States were fleeing debts in England, so it’s no surprise that the U.S. ended debtors’ prisons long before England, which continued to use them well into the 20th century,” Ware said.
While the United States has done away with debtors’ prisons, many parallels exist today. For example, debtors who lose lawsuits can be ordered by courts to appear in person to answer questions about their income and assets. If debtors fail to appear at that time and place, they can be held in contempt of court, and an arrest warrant will be issued. The debtor can stop the arrest by agreeing to a payment plan, but if the debtor again misses payments, he or she may be arrested.
“While technically jailed for contempt of court, not the underlying debt, that distinction may be lost on a struggling debtor who cannot afford a lawyer to explain it and advocate for the debtor,” Ware said.
More fundamental parallels connect the England Ware studied with the United States of today. Then and now, when unpaid creditors win a lawsuit, they don’t actually receive money but simply have a legal document (judgment) stating they are owed money. In order to receive payment, some sort of additional pressure on the debtor is often required.
“But what types of pressure should the law permit, and when should debtors be relieved of that pressure by filing for bankruptcy? Those are the perennial questions,” said Ware, who has taught debt-collection and bankruptcy law for more than 15 years.
Today that pressure on judgment debtors often takes the form of wage garnishment. States have varying restrictions on how much, if any, of a person’s wages may be garnished, and there is a federal limit on how much can be withheld as well. Bankruptcy usually ends garnishment and other forms of debt-collection pressure, Ware said, so about 1 million debtors a year file for bankruptcy in the United States. Bankruptcy relief was much less generous in early 20th century England, according to Ware’s article.
In both 1909 England and the United States today, some argue that a typical debtor’s wages and assets should be protected from the collection efforts of creditors, especially those whose business practices seem designed to exploit unsophisticated or desperate borrowers. In contrast, the other side in this perennial debate argues that reducing the pressure on debtors to pay increases lenders’ losses from bad loans and thus makes them less likely to lend to borrowers who lack valuable collateral or strong payment histories.
“Easily available credit for low- and moderate-income borrowers was the key issue in England a century ago and is still central in today’s consumer debt and bankruptcy debates,” Ware said. “In every era, it seems, some argue that a plentiful supply of consumer credit lowers interest rates and helps people borrow in ways that improve their lives, while others argue that it tempts people to live beyond their means — with bad results not just for those debtors unable to pay but also for their families and society as a whole.”
These recurring issues appear in several of Ware’s classes, including bankruptcy and consumer law. While bankruptcy law focuses on relief for those unable to pay their debts, “consumer law generally tries to protect people from incurring too much debt — or the wrong kinds of debt — in the first place,” Ware said.
Consumer law is changing rapidly as a new federal agency, the Consumer Financial Protection Bureau, considers new regulations on several aspects of consumer credit agreements, including consumer arbitration, a topic on which Ware has testified before both houses of Congress and as an expert witness in court.
Consumer credit agreements are now influenced by far more complex regulation and technology than existed in the era of English debtors’ prisons, when credit was usually extended by a local merchant who knew the borrower personally. Today’s credit bureaus electronically track billions of transactions a year and assemble the data on each consumer in detailed reports available to lenders thousands of miles away who allow consumers to apply for credit online.
While more complex regulation and technology create new issues for lawyers, Ware emphasizes that the basic policy questions for lawmakers remain largely the same as they were generations ago.
“Usury law and other regulations of consumer credit agreements have been with us for centuries, and they raise very deep, timeless questions about human nature,” Ware said. “When are people suited to deciding for themselves which legally binding agreements to make, and when do they need lawmakers to restrict their choices so risky options are off the menu? And if lawmakers prohibit certain credit agreements as too risky, does that reduce bad loans or just drive them to a black market?”