Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP® Joel Ohman

UPDATED: Feb 9, 2012

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Imagine a world that not only rebuked and demonized those who fell behind on their loan payments, but also threw them in jail. That world was extinguished in the 19th century, and has since become an anxiety-producing fear we’ve all nearly forgotten about.


Historically, borrowers were not only expected to pay back personal loans, they were required to. Sure late fees were handed out and collateral was repossessed, but there was an additional punishment that most today—particularly those in a nation founded on liberty—would find utterly appalling: one’s freedom.


Debtors were thrown into prison, separated from their families, unable to work, and unable to provide for those depending on them. The prisons of old, referred to in the past as “gaols” (still pronounced with a hard “G” sound, very similar in sound to modern English’s “Jail”), which was the French word for cage, were packed full with this type of unfortunate criminal. Many of those who were involuntarily visiting debtor’s prison did so until they died of either old age or of disease that spread rampantly amongst the overcrowded inhabitants.


Back in the day, regardless of the personal loan terms lenders may have offered, borrowers would have been very wary to apply for anything outside of their means to repay. A housing collapse like the one seen in 2007 would never have occurred, as those seeking personal loans for their homes would have tried their hardest to avoid anything resembling the volatile loans of the last decade.


While debtor’s prison was seen as a counter-productive punishment that took a man’s freedom away, it ultimately failed to remedy the situation. It did nothing for the lender since his debtor was imprisoned and essentially forced to “not” make any money. Consequently, when a lender commissioned the state to lock a debtor up, that lender knowingly signed away his outstanding debt as a wash.


It was because of this counter-productivity that we, and most other civilized nations, abolished debtor’s prison. But while still existent in some less-than-hospitable countries, some fear a new version of debtor’s prison is making an emergence. Like the flu virus that evolves to escape the entities looking to kill it, debtor’s prison is proving to be a crafty, cunning, and elusive concept that, instead of dying, is now creeping back in a new, insidious form.


A Return of Sorts


While the practice of imprisoning people solely due to unpaid debts has been abolished by the federal government, there are still ways one can be punished with prison time based on unfulfilled financial obligations. Those who refuse to pay child support, alimony, and court-ordered fines are treated with harsh penalties. Committing fraud can carry a very weighty jail sentence as well. While those crimes revolve around unpaid debts, the punishment is so severe because it’s not a financial institution that suffers, but rather individuals that the courts have deemed vulnerable and in need of protection.


However, there is now evidence suggesting that debtor’s prison is trying to be used to punish other types of financial criminals as well—namely those who skip out on their own personal loan and personal debt obligations.


“Imprisoning those who fail to pay fines and court costs is a relatively recent and growing phenomenon,” said the ACLU in a report made late last year. “States and counties, hard-pressed to find revenue to shore up failing budgets, see a ready source of funds in defendants who can be assessed legal financial obligations that must be repaid on pain of imprisonment.”


One such victim was a man named Leroy Sorden who was sentenced to a month in jail after he couldn’t make a $100 court-ordered fine. At the time he was jailed, Sorden was unemployed and relying on food stamps to provide for himself, his mother, and his six siblings. Like the debtor’s prison that were supposedly left to exist only in the history books, our modern day jail took a man away from his family, put him in a position where the potential to make money was non-existent, and left his dependants without a provider.


Just imagine if those who defaulted on their personal home loans were arrested in a similar fashion. Our prisons would be overflowing with millions of middle class citizens who couldn’t afford an inflated, underwater asset.


Walking in Their Shoes


While millions aren’t being pursued, some still are. Last year in a small Illinois county, 13 personal loan borrowers were slapped with arrest warrants, resulting in five actually serving time in jail, according to Wall Street Journal.


“I wish I could do it more,” said the county judge who tried the debt-ridden criminals. “It’s often the only remedy to get people into court and paying their debts.”


Such a statement begs us to at least entertain the fact that debtor’s prison just might have a place in our society. We need to ask ourselves what exactly it means to refuse to pay off unsecured personal loan debt. As much as we want to avoid saying it, we must admit refusing to repay the debt to a creditor is essentially stealing.


It’s one thing if a home loan borrower is unable to pay back his mortgage and thus relinquishes his home to the lender—as agreed upon when the lender and borrower entered into the loan agreement. But it’s completely another when no collateral is put up and a borrower accepts a personal loan in return for the promise to repay the debt. If there were no repercussions for approaching somebody for money, promising to pay it back, then essentially stealing it by refusing to return the money, society would see a large decline in lending activity. Without lenders, the economy would slow to a tortoise’s pace, and truly cause America to drop out of the world race for power.


And don’t make the mistake of assuming that’s a slippery slope. Imagine if you had money and a stranger approached with an offer to borrow that money at interest. But with no enforceable contract, there’s nothing forcing that stranger to adhere to the agreement. It would be a poor financial move to agree to such a transaction, as your hard earned money would be at risk of just vanishing.


The professional world is no different. While it’s a poor solution, some counties are trying to evoke the medieval practice of imprisoning debtors in jail.  This frantic struggle to regain financial security is one reached for in desperation, but demonstrates the need for this problem to be addressed. If the economy is truly to find its footing once more, lending and borrowing must take place with the complete trust of both parties.