January 19, 2021 7 min read
This article was translated from our Spanish edition using AI technologies. Errors can occur due to this process.
The opinions expressed by the entrepreneur’s contributors are their own.
Editor’s Note: This article is based on US law and cases.
Imagine buying a second home that you need to fix. You spill your sweat, let alone your money, to make it look good. Once you’re done, choose to rent it instead of selling it. Your investment will take longer to recover, but you will have a stable source of income later. Maybe you can even stay in retirement.
But then the city council sends you a letter: “The times for tenants are difficult now, so we forbid you to collect rent.” After some freaking out, call City Hall and ask if councilors have banned the bank from charging you for the $ 100,000 loan you bought the house for each month.
They say no. The city council just canceled the rent. I’m so sorry.
Unfortunately, this is no longer a hypothetical situation. The city of Ithaca in central New York wants to cancel the rent in order to relieve the tenants. He said nothing about the burden this decision would place on others.
This is just one recent example of a trend that is re-emerging among good people who want to help but don’t want to learn from history: Let’s solve our financial problems simply by saying, “Debt is dead.” A move is also underway in Congress to write off $ 1.6 trillion in student loan debt – as if that amount of money could be wiped out.
Debt relief only changes the burden
Can city guides really order you to let people live on your property for free? Fortunately not. Not in this country (USA) anyway, and not without a significant domain – you are getting a fair market value for the property the government is confiscating.
Of course, the leaders of Ithaca did not think this through. As USA Today reported recently, “Ithaca does not yet have a plan on how to proceed with the cancellation of the rental if the state approves its request.” The mayor told reporters that the city will develop the rental cancellation structure more fully once it is approved.
Image: Depositphotos.com
If the mayor canceled the debt, he would be sued immediately. Landlords would argue in court that the government is effectively taking back their property by ordering them not to collect rent.
I’m a CPA and Personal Debt Specialist, not a lawyer, so I don’t want to discuss any legal matters. I want to talk about the practical and personal implications of debt relief, a noble but dangerous concept.
In the long run, debt relief doesn’t help much. In fact, it can end up hurting everyone.
Why debt relief doesn’t cancel anything
In April, Representative Ilhan Omar (D-MN) proposed the Rent and Mortgage Cancellation Act, which “provides for nationwide cancellation of rent and mortgage payments for the duration of the coronavirus pandemic”.
So that the financial burden does not lie with the owners alone, the proposal contains an unspecified “aid fund”. But the law text never mentions an approximate amount of dollars in this relief fund, although I would expect it to grow to hundreds of billions of dollars. Who would pay for it? We all. All taxpayers in the United States would pay for this relief.
So the legislation wouldn’t actually cancel the debt. It would just make every American pay rent on apartments and houses that they don’t live in and have never seen.
Fortunately, the bill has been stuck on the House Financial Services Committee since its inception in mid-April. But the concept of debt relief lives on in the minds of many.
Debt relief ignores the real problem
While the concept of debt relief isn’t new, it broke the media six years ago when a group formed from the Occupy Wall Street movement did something new: organizers bought nearly $ 4 million in bad student loans – and then announced that they would not be charged. You canceled it.
At that time, I consented to his move. There was compassionate capitalism in action: individuals bought private debt and decided to cancel it. There was no coercion, no loss of wealth, and no tax money at stake.
But I also noticed that even after they had all paid back $ 1.6 trillion in student loans, they hadn’t solved the problem. In another decade, there would be another $ 1 trillion in student loan debt. Big news then was that student loan debt nationwide was over $ 1 billion. Nowadays? It’s $ 1.6 trillion.
Obtaining student loans is like emptying a bathtub with the tap still on. You’ll have to do this forever unless you can turn off the water. Let’s talk seriously about closing the debt instead of canceling it.
The way to follow
Let me be clear: there is no silver lining in a pandemic. However, we can learn lessons that have more to do with financial health than physical health. Obviously we’ve all learned to spend less on food. USA Today reported that prior to the pandemic, Americans were spending $ 228 a month “on groceries that were not eaten at home, including fast food, take-out, delivery, vending machines and food trucks.” While takeaway and home delivery are hugely popular right now, everyone has personal stories about learning to cook at home. I can’t tell you how many friends of mine on Facebook posted photos of spices and tins of food they couldn’t remember what they owned that were pushed to the back of their pantry.
People are pinching pennies today because they don’t know if they’ll make a dollar tomorrow. Many have been laid off and those receiving unemployment benefits do not know when it will end. So spending of all kinds is falling. It is necessary now, but if we can maintain some of that frugal spirit when life inevitably returns to normal, we need not talk about debt relief. We can start paying for it. It won’t be easy and it will definitely not be fun. But it’s not just the best way; It’s probably the only way.
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