The People’s Bailout: Occupy Wall Street Wants to Forgive Your Debt

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Bathroom walls are stripped of copper plumbing in a condemned house in Warren, Ohio, Oct. 28, 2012. Warren, located in northeast Ohio, was hit especially hard by the recession and the home foreclosure crisis.

During the height of the financial crisis, the federal government pulled out all the stops to ensure the survival of the nation’s largest financial institutions. Along the way, shareholders and creditors of big Wall Street firms were bailed out as well, saved from losses they deserved for making poor investment decisions.

Since that time, much of America has been clamoring for the same attention to be paid to the over-indebted citizens of the country as well. While total household debt has come down since the recession, the poor economy has left many Americans in a position where they are unable to repay their loans.

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So an offshoot group of Occupy Wall Street called Strike Debt has begun raising money to buy defaulted and distressed debt from brokers, so that they can forgive the loans outright. Because this debt has been in default for so long, it can be bought for very cheap, sometimes for as little as a few pennies on the dollar. According to a statement, the group has already “spent $466 and successfully bought and abolished $14,000 of medical debt.” The group will be holding a fundraiser in New York City on November 15 featuring celebrities like comedian Janeane Garofalo to raise further funds for the project, with the goal of raising $50,000 to abolish $1,000,000 worth of debt.

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The project is interesting for several reasons. There has been much resistance to any government facilitation of debt forgiveness from the political right, which sees such action as an immoral bailout that distorts the incentives of a properly functioning free market. Furthermore, it’s another example of members of the Occupy movement working within the financial system to bring about change, much like the Occupy the SEC group, which has eloquently petitioned financial regulators to help ensure that Dodd-Frank reforms are implemented in a way that keeps the pressure on big banks.

But it’s difficult to know how much relief this sort of action will bring families. Debt can only be bought at such low valuations when creditors have pretty much given up on the idea that they’ll ever recover their principal or interest payments. That’s because for things like medical or credit-card debt, bankruptcy law provides a way for borrowers to get out from under the burden of the debt. Bankruptcy, along with foreclosure, is one of the main reasons why total household debt has decreased since the recession.

The real debt problem in this country, however, is mortgage and student debt. A program like this will do nothing to foment principal reduction on mortgages – a strategy many experts believe is a win-win-win for mortgage investors, homeowners, and the broader economy because it will help avoid foreclosure, keep people in their homes, and stimulate the economy and housing market in the process. Private banks have begun to implement principal reduction, but political opposition has kept it from being used on loans owned by government-backed Fannie Mae and Freddie Mac.

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And student loan debt cannot be expunged in bankruptcy. This is one of the fastest growing segments of household-sector debt, and the burden it will place on recent graduates and current students is immeasurable. But because this debt cannot be forgiven through bankruptcy, it’s unlikely that much of it will be able to be purchased very cheaply by Strike Debt.

So while this debt relief will provide help for families, and perhaps save some from the indignity and hardship of bankruptcy, it’s unlikely that such an effort will do much to ease the household debt problem significantly. Nor will such a program reform the injustices in the bankruptcy code. For that to happen, OWS and other groups will have to engage the American public and promote reforms through the lawmaking process itself.