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Debt relief or debt cancellation is the partial or total forgiveness of
debt Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. The ...
, or the slowing or stopping of debt growth, owed by individuals, corporations, or nations. From antiquity through the 19th century, it refers to domestic debts, in particular agricultural debts and freeing of debt slaves. In World War I the United States Treasury made large loans to the allies that were postponed, reduced and finally paid off in 1953. In the late 20th century, it came to refer primarily to Third World debt, which started exploding with the Latin American debt crisis (Mexico 1983, etc.). In the early 21st century, it is of increased applicability to individuals in developed countries, due to credit bubbles and housing bubbles.


International debt relief


First World War reparations

War debt payments by World War I Allies to the U.S. had been suspended in 1931—only Finland paid in full—and American public opinion demanded repayments resume as a condition of U.S. postwar aid. Germany had suspended its reparations payments due under the 1919 Versailles Treaty and payable to Britain, France and others, as well as loans due to the United States. Chancellor Konrad Adenauer decided that permanent good will required their resumption. The 1953
Agreement on German External Debts The London Agreement on German External Debts, also known as the London Debt Agreement (German: ''Londoner Schuldenabkommen''), was a debt relief treaty between the Federal Republic of Germany and creditor nations. The Agreement was signed in L ...
, which resumed German's war reparations, is a notable example of international debt relief.


Less Developed Country Debt

Debt relief for heavily indebted and
underdeveloped Underdevelopment, in the context of international development, reflects a broad condition or phenomena defined and critiqued by theorists in fields such as economics, development studies, and postcolonial studies. Used primarily to distinguish s ...
developing countries A developing country is a sovereign state with a lesser developed industrial base and a lower Human Development Index (HDI) relative to other countries. However, this definition is not universally agreed upon. There is also no clear agreem ...
was the subject in the 1990s of a campaign by a broad coalition of development NGOs, Christian organizations and others, under the banner of
Jubilee 2000 Jubilee 2000 was an international coalition movement in over 40 countries that called for cancellation of third world debt by the year 2000. This movement coincided with the Great Jubilee, the celebration of the year 2000 in the Catholic Chur ...
. This campaign, involving, for example, demonstrations at the 1998 G8 meeting in
Birmingham Birmingham ( ) is a city and metropolitan borough in the metropolitan county of West Midlands in England. It is the second-largest city in the United Kingdom with a population of 1.145 million in the city proper, 2.92 million in the We ...
, was successful in pushing debt relief onto the agenda of Western governments and international organizations such as the
International Monetary Fund The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution, headquartered in Washington, D.C., consisting of 190 countries. Its stated mission is "working to foster glo ...
and
World Bank The World Bank is an international financial institution that provides loans and grants to the governments of low- and middle-income countries for the purpose of pursuing capital projects. The World Bank is the collective name for the Inte ...
. The
Heavily Indebted Poor Countries The heavily indebted poor countries (HIPC) are a group of 39 developing countries with high levels of poverty and debt overhang which are eligible for special assistance from the International Monetary Fund (IMF) and the World Bank. The HIPC ...
(HIPC) initiative was ultimately launched to provide systematic debt relief for the poorest countries, whilst trying to ensure the money would be spent on
poverty reduction Poverty reduction, poverty relief, or poverty alleviation, is a set of measures, both economic and humanitarian, that are intended to permanently lift people out of poverty. Measures, like those promoted by Henry George in his economics ...
. The HIPC programme has been subject to conditionalities similar to those often attached to International Monetary Fund (IMF) and World Bank loans, requiring
structural adjustment Structural adjustment programs (SAPs) consist of loans (structural adjustment loans; SALs) provided by the International Monetary Fund (IMF) and the World Bank (WB) to countries that experience economic crises. Their purpose is to adjust the co ...
reforms, sometimes including the privatisation of
public utilities A public utility company (usually just utility) is an organization that maintains the infrastructure for a public service (often also providing a service using that infrastructure). Public utilities are subject to forms of public control and ...
, including water and electricity. To qualify for irrevocable debt relief, countries must also maintain macroeconomic stability and implement a Poverty Reduction Strategy satisfactorily for at least one year. Under the goal of reducing inflation, some countries have been pressured to reduce spending in the health and education sectors. While the World Bank considers the HIPC Initiative a success, some scholars are more critical of it. The Multilateral Debt Relief Initiative (MDRI) is an extension of HIPC. The MDRI was agreed following the G8's Gleneagles meeting in July 2005. It offers 100% cancellation of multilateral debts owed by HIPC countries to the
World Bank The World Bank is an international financial institution that provides loans and grants to the governments of low- and middle-income countries for the purpose of pursuing capital projects. The World Bank is the collective name for the Inte ...
, IMF and
African Development Bank The African Development Bank Group (AfDB) or (BAD) is a multilateral development finance institution headquartered in Abidjan, Ivory Coast, since September 2014. The AfDB is a financial provider to African governments and private companies ...
. One of the targets of the UN
Sustainable Development Goals The Sustainable Development Goals (SDGs) or Global Goals are a collection of 17 interlinked objectives designed to serve as a "shared blueprint for peace and prosperity for people and the planet, now and into the future".United Nations (2017) R ...
, specifically Goal 17, is to "assist developing countries in attaining long-term debt sustainability through coordinated policies aimed at fostering debt financing, debt relief and debt restructuring". This will help poor countries "reduce debt distress".United Nations (2017) Resolution adopted by the General Assembly on 6 July 2017, Work of the Statistical Commission pertaining to the 2030 Agenda for Sustainable Development
A/RES/71/313


Personal debt relief


Origins

Debt relief existed in a number of ancient societies: * Debt forgiveness is mentioned in the
Book of Leviticus The book of Leviticus (, from grc, Λευιτικόν, ; he, וַיִּקְרָא, , "And He called") is the third book of the Torah (the Pentateuch) and of the Old Testament, also known as the Third Book of Moses. Scholars generally agree ...
(a Judaeo- Christian scripture), in which God counsels Moses to forgive debts in certain cases every Jubilee year – at the end of Shmita, the last year of the seven-year agricultural cycle or a 49-year cycle, depending on interpretation. * This same theme was found in an ancient bilingual Hittite-
Hurrian The Hurrians (; cuneiform: ; transliteration: ''Ḫu-ur-ri''; also called Hari, Khurrites, Hourri, Churri, Hurri or Hurriter) were a people of the Bronze Age Near East. They spoke a Hurrian language and lived in Anatolia, Syria and Norther ...
text entitled "The Song of Debt Release". * Debt forgiveness was also found in Ancient Athens, where in the 6th century BCE, the lawmaker
Solon Solon ( grc-gre, Σόλων;  BC) was an Athenian statesman, constitutional lawmaker and poet. He is remembered particularly for his efforts to legislate against political, economic and moral decline in Archaic Athens.Aristotle ''Politic ...
instituted a set of laws called seisachtheia, which canceled all debts and retroactively canceled previous debts that had caused slavery and serfdom, freeing debt slaves and debt serfs. * In addition, the
Qur'an The Quran (, ; Standard Arabic: , Quranic Arabic: , , 'the recitation'), also romanized Qur'an or Koran, is the central religious text of Islam, believed by Muslims to be a revelation from God. It is organized in 114 chapters (pl.: , si ...
(the
Muslim Muslims ( ar, المسلمون, , ) are people who adhere to Islam, a monotheistic religion belonging to the Abrahamic tradition. They consider the Quran, the foundational religious text of Islam, to be the verbatim word of the God of Abrah ...
scripture) supports debt forgiveness for those who are unable to pay as an act of charity and remission of sins for the creditor. The injunction is as follows:


Contemporary

In the United States of America for the years preceding the
financial crisis of 2007–2008 Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of ...
, non-housing personal debt (auto loans, credit cards, student loans, etc.) rose significantly from approximately $2.05 trillion at the start of 2003 to a peak of $2.71 trillion in Q4 of 2008. It was not until Q3 of 2012 that unsecured personal debt reached this level again. Since that time, unsecured personal debt has risen steadily to $3.76 trillion at the end of the third quarter of 2017. The other large change in unsecured personal debt is that an increasing portion of it is now student loan debt, from 12% in Q1 of 2003 to 53% in Q3 of 2017. The increasing size of the non-housing personal debt market and ease with which one can obtain personal credit has led to some consumers falling behind on payments. As of Q3 2017, student loans have the highest rates of serious delinquency (90 or more days delinquent) with approximately 9.6% of all student loan debt falling into this bucket. Credit card debt and auto loan debt have serious delinquency rates of 4.6% and 2.4% respectively. When consumers begin to fall behind on payments, they have several options to discharge the debt, either in full or in part. The first method is declaring bankruptcy, which has the immediate effect of stopping any payments made to creditors. In the United States, the two primary avenues of bankruptcy for an individual are Chapter 13 bankruptcy and Chapter 7 bankruptcy. Another option is to consolidate these debts into a single loan, commonly known as debt consolidation. Debt relief, on an individual level, refers mainly to the negotiation for a reduction of a debt by either the consumer or a debt settlement agency. Through this arrangement, consumers agree to pay the creditor a fixed amount of money (generally a discount on their outstanding debt) either in a lump sum or under a payment plan. The debt settlement industry has had significant regulatory scrutiny since its inception with changes implemented in 2010 by the FTC. As the disposition of personal debt is a highly regulated industry, consumers are urged by the FTC and other trade organizations to do significant research and find an independent credit counselor to guide them through the process. In 2019, the Texas Legislature forgave an estimated $2.5 billion in debt when it abolished its "Driver Responsibility Surcharge" in all but driving while intoxicated (DWI) cases. This surcharge was an extra three-year civil penalty added onto certain criminal traffic infractions like DWI or driving without a license or insurance. Surcharges were created in 2003 to pay for a roadway network that was never built, and instead half the money was diverted to hospitals, which became reliant on the money, with the rest going into the state treasury. However, the majority of drivers who had surcharges assessed could not pay them. Many people who could not afford either surcharges or insurance continued to drive and racked up huge sums in debt they could never expect to pay. A little-advertised amnesty program and an indigence program that still required partial payment helped some, and were criticized by some who felt it was unfair that they paid and others didn't. But local sheriffs began to complain that the law was causing the jails to fill up with people driving on suspended license, and the judiciary insisted the law was unfair and counterproductive to public safety. Finally, in 2019, the Legislature found different sources to fund hospitals and eliminated the surcharge, along with around $2.5 billion in debt owed by around 1.4 million people. The same year, the Legislature eliminated red-light cameras statewide and effectively canceled those debts, and re-defined "undue hardship" in the Code of Criminal Procedure to allow judges to waive traffic-fine debt for more people.


Tax treatment

In US tax law, debt forgiven is treated as income, as it reduces a liability, increasing the taxpayer's net worth. In the context of the bursting of the United States housing bubble, the Mortgage Forgiveness Debt Relief Act of 2007 provides that debt forgiven on a primary residence is not treated as income, for debts forgiven in the three-year period 2007–2009. The Emergency Economic Stabilization Act of 2008 extended this by three years to the six-year period 2007–2012.


Bankruptcy and non-recourse loans

The primary mechanism of debt relief in modern societies is
bankruptcy Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debto ...
, where a debtor who cannot or chooses not to pay their debts files for bankruptcy and renegotiates their debts, or a creditor initiates this. As part of debt restructuring, the terms of the debt are modified, which may involve the debt owed being reduced. In case the debtor chooses bankruptcy despite being able to service the debt, this is called strategic bankruptcy. Certain debts can be defaulted on without a general bankruptcy; these are
non-recourse loan Nonrecourse debt or a nonrecourse loan (sometimes hyphenated as non-recourse) is a secured loan (debt) that is secured by a pledge of collateral, typically real property, but for which the borrower is not personally liable. If the borrower def ...
s, most notably mortgages in common law jurisdictions such as the
United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. It consists of 50 U.S. state, states, a Washington, D.C., ...
. Choosing to default on such a loan despite being able to service it is called strategic default.


Alternatives


Historical

If a debt cannot be or is not repaid, alternatives that were common historically but are now rare include debt bondage—including debt peonage: being bound until the debt is repaid; and debt slavery, when the debt is so great (or labor valued so low) that the debt will never be repaid—and debtors' prison. Debt slavery can persist across generations, future generations being made to work to pay off debts incurred by past generations. Debt bondage is today considered a form of "modern day
slavery Slavery and enslavement are both the state and the condition of being a slave—someone forbidden to quit one's service for an enslaver, and who is treated by the enslaver as property. Slavery typically involves slaves being made to perf ...
" in international law,The Bondage of Debt: A Photo Essay
, by Shilpi Gupta and banned as such, in Article 1(a) of the United Nations 1956 Supplementary Convention on the Abolition of Slavery. Nevertheless, the practice continues in some nations. In most developed nations, debts cannot be inherited. Debtors' prison has been largely abolished, but remains in some forms in the US, for example if one fails to make
child support Child support (or child maintenance) is an ongoing, periodic payment made by a parent for the financial benefit of a child (or parent, caregiver, guardian) following the end of a marriage or other similar relationship. Child maintenance is paid d ...
payments.


Contemporary

In modern times, the most common alternatives to debt relief in cases where debt cannot be paid are forbearance and debt restructuring. Forbearance meaning that interest payments (possibly including past due ones) are forgiven, so long as payments resume. No reduction of principal occurs, however. In debt restructuring, an existing debt is replaced with a new debt. This may result in reduction of the principal (debt relief), or may simply change the terms of repayment, for instance by extending the term (replacing a debt repaid over 5 years with one repaid over 10 years), which allows the same principal to be amortized over a longer period, thus allowing smaller payments. Personal debt that can be repaid from income but is not being repaid may be obtained via garnishment or
attachment of earnings Attachment of earnings is a legal process in civil litigation by which a defendant's wages or other earnings are taken to pay for a debt. This collections process is used in the common law system, especially Britain and the United States, but ...
, which deduct debt service from wages.


Inflation

Inflation, the reduction in the nominal value of currency, reduces the real value of debts. While lenders take inflation into account when they decide the terms of a loan, unexpected increases in the rate of inflation cause categorical debt relief. Inflation has been a contentious political issue on this basis, with debasement of currency a form of or alternative to sovereign default, and the free silver in late 19th century America being seen as a conflict between debtor farmers and creditor bankers. Inflation, in an economy that is growing, is caused by more money being introduced into circulation by the central bank. If the amount of tender remains constant, a currency ''grows or falls'' at the rate of the reserves that back it. The global prevalence of fractional reserve banking has caused most currencies to decline in value consistently. In a non-fractional (fully backed) reserve system, the growth of a currency is equal to the growth (or decline) of the assets backing it, fees are charged in an upfront manner, and money is worth by what it is backed. Fractional reserve banking has resulted in a transfer of wealth from the holders of currency to investors. Under fractional reserve banking the money supply is allowed to be increased whenever new interest-bearing loans are issued and is often constrained by a reserve ratio, which mandates that banks hold a portion of the wealth they lend out at interest in the form of real reserves. Many nations are in the process of eliminating reserve ratios.


In art

Debt relief plays a significant role in some artworks. In the play ''
The Merchant of Venice ''The Merchant of Venice'' is a play by William Shakespeare, believed to have been written between 1596 and 1598. A merchant in Venice named Antonio defaults on a large loan provided by a Jewish moneylender, Shylock. Although classified as ...
'' by
William Shakespeare William Shakespeare ( 26 April 1564 – 23 April 1616) was an English playwright, poet and actor. He is widely regarded as the greatest writer in the English language and the world's pre-eminent dramatist. He is often called England's nation ...
, , the heroine pleads for debt relief (forgiveness) on grounds of Christian mercy. In the 1900 novel '' The Wonderful Wizard of Oz,'' a primary political interpretation is that it treats free silver, which engenders
inflation In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduct ...
and hence reduces debts. In the 1999 film '' Fight Club'' (but not the novel on which it is based), the climactic event is the destruction of credit card records, dramatized as the destruction of skyscrapers, which allows for debt relief. The television series ''
Mr. Robot ''Mr. Robot'' is an American drama thriller television series created by Sam Esmail for USA Network. It stars Rami Malek as Elliot Alderson, a cybersecurity engineer and hacker with social anxiety disorder, clinical depression and dissociati ...
'' (2015–2019), follows a group of hackers whose main mission is to cancel all debts by taking down one of the largest corporations in the world, E Corp.


See also

*
Anti-globalization movement The anti-globalization movement or counter-globalization movement, is a social movement critical of economic globalization. The movement is also commonly referred to as the global justice movement, alter-globalization movement, anti-globalist m ...
*
Debt jubilee A debt jubilee is a clearance of debt from public records across a wide sector or a nation. Such a jubilee was proposed as a solution to debt incurred or anticipated during the COVID-19 recession. The American economist Michael Hudson is a proponen ...
* Eurodad *
Heavily indebted poor countries The heavily indebted poor countries (HIPC) are a group of 39 developing countries with high levels of poverty and debt overhang which are eligible for special assistance from the International Monetary Fund (IMF) and the World Bank. The HIPC ...
(HIPC) * International development * Jubilee USA Network *
Loan modification in the United States Loan modification is the systematic alteration of mortgage loan agreements that help those having problems making the payments by reducing interest rates, monthly payments or principal balances. Lending institutions could make one or more of thes ...
*
Multilateral Debt Relief Initiative Multilateral Debt Relief Initiative (MDRI) was approved on June, 2005, by the finance ministers of the G8 during the 31st G8 Summit, held at Gleneagles, Scotland. MDRI is different to HIPC, but operationally related. Countries in the termination p ...
(MDRI) * Odious debt * Survie, activist group against Third World debt


References

{{Authority control
Relief Relief is a sculptural method in which the sculpted pieces are bonded to a solid background of the same material. The term '' relief'' is from the Latin verb ''relevo'', to raise. To create a sculpture in relief is to give the impression that th ...
Economic development programs