Friday, December 11, 2015

non-recourse unsecured debt

This is one of those ideas that is not at all well thought-out and is probably a bad idea, but is here because it struck me as interesting when it popped into my head and maybe it can inspire a better idea.

The Obama administration (I believe) has implemented an income-based repayment program for federal student loans; even if you have a lot of debt and low income, you don't have to pay more than 10% of your income toward the loans.  Student loans are special in some ways; most notoriously, to some extent on the premise that they're secured by your education which can't be repossessed, they can't generally be discharged in bankruptcy.[1]  In practice (and I assume from a formal legal standpoint) it's unsecured debt, but the ability of the lender to come after your assets if you aren't paying on the original official schedule has been curtailed.

Now, one of the nasty things about the design of our welfare systems, though it's much improved from a generation ago, is the speed at which benefits sometimes "phase out" as income goes up. Under AFDC, from 1935–1996, if you made an extra $3000 in a year, your benefits were cut by at least $2000, and for most of those 61 years your benefits were actually cut by the full $3000; there was no particular point in gaining work experience or making similar investments that might help you ultimately get out of poverty.  The successor program to AFDC is much more variable from state to state, but phase-out rates are (I believe) universally lower than 67%, usually no higher than 50%.  SNAP, however, phases out at a 30% rate, which might not seem too bad, but this means that if you earn an extra $100 and are on both programs, you may lose $50 in TANF benefits and $30 in SNAP benefits.  Some programs, like Medicaid, are even worse, where if you're $1 below the eligibility threshold, making an extra $2 can cost you your health care; Obamacare subsidies, depending on the circumstances, have a similar structure, where they will decrease gradually until you get to a certain point, but drop discontinuously to zero at a particular threshold.  These health insurance cliffs both seem like bad program design, but often even reasonably designed phase-out rules become problematic when they're phasing out together.  I've suggested that one be able to elect to split 50/50 with the IRS any portion of one's income in exchange for having it officially removed from income for all tax and welfare benefit calculations; this would provide something of a safety valve where, if one found oneself in an income range with 80% in aggregate phaseouts or just above the Medicaid cutoff, one could get 30% of the extra earned dollars back or pay a small amount to get your health insurance back.  More importantly, one would be able to take on extra work without worrying that one is risking eligibility for these programs.

My thought, then, is that perhaps there are other debts we would want to treat similarly to student loan debt, but we might want to lump together with it.  Debtors with those kinds of debt could pay 60% off the top to be at a lower income level for purposes of taxes, benefits, and also income-based debt payment plans, with $10 of each $60 earmarked for creditors, but perhaps more than that if the debtor/taxpayer is not in an extensive phaseout income range.  The debts could include student loans, fines, and judgments from courts, including back child support; in all cases, debts that one wants to see paid, but with the understanding that someone with little reason to work isn't going to be paying them off.

[1]I feel better about this rule in Chapter 7 than Chapter 13, where I would at least be inclined to allow them to be reduced, but that's a bit off topic.

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