The response to the COVID-19 outbreak has caused an economic downturn in America. Many businesses and families will likely have to make difficult choices about their finances for months – potentially years – to come. One option available to many North Carolinians is debt settlement, a private alternative to filing for bankruptcy. This week, JLF’s Jon Sanders analyzed a North Carolina House Bill that would prohibit this practice. Sander writes:

North Carolina’s economy is reeling under the impacts of the COVID-19 pandemic and Gov. Roy Cooper’s drastic restrictions. With businesses locked down or only allowed to open halfway at best, families are piling on loans to keep afloat while businesses that still can are taking on enormous debts to survive…

The last thing policymakers should do is make things even harder for people trying to piece their lives back together. But that would be the effect of expanding North Carolina’s prohibition against debt settlement, which is what House Bill 1067 would do. 

Sanders explains debt settlement:

Currently, debt settlement companies in NC cannot receive their fee until after their client’s debt has been settled…

A North State Journal op-ed from Tomas Gordon, CEO of the debt settlement firm ClearOne Advantage, explains how debt settlement works for those who need it[:]

Debt settlement offers financially distressed consumers a federally regulated, private-sector alternative to bankruptcy, enabling them to settle their debts for less than they owe and to remain productive, contributing members of their communities. Debt settlement companies negotiate with consumers’ creditors to settle debts for less than what the consumers owe, providing a much-needed lifeline in the midst of economic uncertainty.

A May 2020 study by Harvard Kennedy School Professor Will S. Dobbie found that “individuals enrolling in debt settlement programs receive an average debt write-down of 33.2% on settled accounts after accounting for fees.” The same study found that, on average, consumers in debt settlement programs see $2.64 in debt reduction for every $1 in fees.

HB 1067 would remove this option for persons headed towards insolvency. Sander writes:

From a distance, paying a fee to someone to help settle your debt sounds like being taken advantage of when you already can’t afford it. Closer up, however, seeing your debt reduced by two and half dollars for every dollar you pay in fees sounds like a rational decision, especially to avoid bankruptcy and the fallout from that.

Worse outcomes tend to happen when paternalistic policymakers decide that other people are making irrational choices that aren’t in their best interests and the only way to save them is to take those choices away. A general rule of thumb for policymaking should be that more choices are better.

Read Sanders’ full brief here. Read more from Sanders on the John Locke Foundation website here.