Posted on October - 13 - 2010

Loan modification, debt and Bankruptcy

NACA, Neighborhood Assistance Corporation of America, is in town with their “Dream Tour” to save people from the prospect of losing their home and tarnishing their credit report with the monthly report to the credit bureau that there is a new mortgage late and perhaps a past due amount. Nothing in the home loan mortgage modification is positive for a person’s credit report and resulting credit score.

A little ironic that on Columbus Day, yes you remember the guy we honor for finding this piece of real estate in 1692, NACA will pack up and leave town after interviewing ten’s of thousands of desperate struggling home owners. Many, if not all, plagued with overwhelming credit card debt, medical bills, unpaid collections with credit reports that are not truly accurate in the information the credit reporting bureaus have recorded.

It’s a good thing that being in credit debt was a crime and is not a crime. What was Columbus looking for? Safe passage to the new World for everyone? People from Europe eventually found themselves indentured in early America for bad debt. Most found themselves in debtor’s prison.

A debtor’s prison was a place where people were incarcerated for, you guessed it, not being able to pay their debts, rent and taxes. The principle of a debtor’s prison can be traced to England. In 1601, The “Poor Law” was enacted that basically assigned the responsibility of the poor to local parishes. With the growing number of poor, the parishes built workhouses to employ them on a profitable basis. What a great idea that was being that everyone employed was a “criminal” with bad debt.

Along came the Poor Law Amendment of 1834 which attempted to standardize the treatment of the poor throughout England. The local parishes were grouped into unions and these unions assumed responsibilities for the workhouses. The law also provided that no relief could be given to any able-bodied persons in their own homes. Any person that had their own home and was seeking relief had to live in the workhouse. What a loan modification that would turn out to be? Go to the workhouse during the loan modification process. I’d have to ask if this a trial period? By the first half of the 20th century, social welfare services and programs were put in place that eventually replaced the workhouse system………and, along comes Bankruptcy.
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In England, in the 17 and 1800’s you could be thrown in jail if you failed to pay your debts and to make it worse, you had to pay for your food and clothes in jail. Thus, debtor’s prison was often a death sentence. A particularly cruel and drawn out death by exposure and starvation. If they could people would flee to the colonies to avoid creditors and debtors’ prison because the colonies had instituted bankruptcy protections to allow debtors to keep their liberty and their means (shelter, clothing, tools and so forth) necessary to remain gainfully employed. A second chance…….

Later, in the United States, the solution, for some, to bankruptcy was to flee westward, to wherever the frontier happened to be. First, “gone to Kentucky”, then “gone to Texas” and finally “lit out for the Territories.”

The gradual development of bankruptcy law can be seen by comparing the Constitutions of the early states with the later, western states. The original colonies and the Federal Constitution did not prohibit imprisonment for debt, indentured servitude, or slavery. In the western states and territories settled after the Civil War, State Constitutions prohibited. imprisonment for debt. At the federal level in the United States, there was no permanent bankruptcy statute until 1898: about the time that the United States ceased to have a wilderness “frontier”.

The New Mexico constitution drafted in 1911 contains a typical provision outlawing debtors’ prison: “No person shall be imprisoned for debt in any civil action.”. N.M. Const. , Art. II, § 21. (Making it a constitutional provision makes it much harder for the law to be changed. There are no such protections at the federal level, and technically all it would take is an act of Congress to bring back debtors’ prisons).
Note the limitation to civil actions. You can still be jailed for failure to pay fines imposed to punish criminal activity, and for contempt of court.Contempt, civil or criminal, however, requires proof of willful intent: you have the money but refuse to pay. Inability to pay is a defense, and just being poor is not a crime.

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