A Modest Proposal

There has been a lot of talk about the sub-prime mortgage crisis lately. The presidential candidates are very concerned about it, but don't seem to be offering a lot of specifics. One of the candidates wants to impose a 90 day moratorium on foreclosures. This will help the problem--for about 90 days.

Perhaps we as bankruptcy lawyers can suggest a remedy from our area of the law: credit counseling. After all, when do you really need credit counseling? If it is good to use when deciding to file bankruptcy, wouldn't it be even better when deciding whether to incur the debt in the first place?

Here is what I would envision. Prior to taking out a mortgage loan, a prospective borrower would have to receive a credit counseling briefing from someone who had actually read their loan documents and looked at their financials. If the credit counselor recommends against the loan and the borrowers still want to do it, the borrowers would have to pass a test on the contents of their loan documents (a passing grade being 70, the same as it is in public school). If the prospective borrower receives a passing grade on the exam and still wants to take out the bad loan, the credit counselor would give them a stern talking to and would stamp "Don't Do It!!!" on the loan application. If at this point, the borrower insists, they would be allowed to do the loan. After all, this is a free country. However, if they choose to take out a bad loan after being told not to do it, reading the loan documents and being told not to do it a second time, they would forfeit all protections under federal law. If they default, they could be subjected to abusive debt collectors, barred from filing bankruptcy and be thrown in debtor's prison.

On the other hand, if the borrower passed credit counseling, they would be allowed to take out the loan and would also receive a golden ticket. If they ever got into financial difficulty and were posted for foreclosure, they could take their golden ticket to the bankruptcy court and exchange it for one that said "honest but unfortunate debtor". With the "honest but unfortunate debtor" ticket, they would be allowed to restructure their loan at whatever level they could afford to pay. Why would we do this? If they have the golden ticket, we know that they made a responsible decision to incur credit. Since they made a responsible decision to incur credit, any subsequent default would have to be the result of unforeseeable hardship or calamity. Thus, we would know that they were the very picture of the honest but unfortunate debtor that the bankruptcy laws are supposed to protect.

This would be a win-win solution for almost everyone. Once a few debtors were cast into outer darkness for taking out debts that they had no business incurring, other borrowers would learn to shy away from the "Don't Do It!!!!" stamp. On the other hand, if lenders knew that they would have to live with debtors holding the golden ticket, they might be more careful about who they lend to. Of course, the other possibility is that people won't learn and will keep making the same mistakes over and over again and that the only people who benefit will be the newly minted armies of credit counselors. However, at least we know that someone would benefit.

Disclaimer: No firm that I work for or any of their clients approves this proposal.