Indebtedness

Indebtedness is the state of being in debt, or owing money to someone else. When someone is in debt, it means that he has borrowed money, or received goods or services, with a promise to pay the sum back. Someone can be in debt for bills that are due now, as well as bills that he knows will be due in the future. For example, indebtedness can refer to someone’s mortgage, or a car purchase on credit. To explore this concept, consider the following indebtedness definition.

Definition of Indebtedness

Noun

  1. The state of owing someone else money
  2. The amount of someone’s debt

Origin

1640-1650      English

What is Indebtedness

Indebtedness is the state of owing people money, or being indebted to them. For example, indebtedness occurs when someone takes out a mortgage, or finances a car. Most people cannot pay for a home or a car outright, and so they are indebted to the bank for the amount of the loan that was given to them. Using a credit card to buy such things as clothing, or to pay for a trip, results in indebtedness. Indebtedness is not the same as a failure to pay. Someone can be indebted to the bank because he owes the bank money, but his monthly payments are still current.

Debt-to-Income Ratio

Someone’s debt-to-income ratio is the total amount of debt he has for the month, divided by his gross monthly income (money earned before taxes). Lenders use borrowers’ debt-to-income ratio to determine whether or not a borrower makes enough money to be able to repay the debt.

For instance, if someone pays, on a monthly basis, $1,000 on his mortgage, $500 for a car payment, and another $500 for his remaining debts, then his monthly debt payments amount to $2,000 when added together. If he makes $6,000 a month, then his debt-to-income ratio is 30% ($2,000 is 30% of $6,000).

Understandably, those with higher debt-to-income ratios are more likely to have difficulty making their monthly payments because their debts outstrip the amount of money they make. In most cases, the highest debt-to-income ratio a borrower can have when applying for a mortgage is 43%. This means that his debts must not exceed 43% of his income to ensure that he will have enough income freed up to make his monthly mortgage payments on time.

Of course, there are exceptions to this rule, and creditors may be able to provide mortgages to those whose debt-to-income ratios exceed the 43% threshold. However, in order to do this, they must be able to make reasonable effort in good faith, and following the rules set down by the Consumer Financial Protection Bureau (CFPB), to ensure that the borrower is able to repay the loan despite owing more than 43% of his income to outstanding debts. It is for this reason, among others, that being financially responsible is so important.

Having a high credit score can make all the difference in helping a lender decide whether or not to offer a borrower credit. When a borrower shows that he will make good on his promise to pay back a debt, his credit score may back him up, even if he currently has a 43% debt-to-income ratio. After all, his current debt-to-income ratio may be temporary, and the lender may be rejecting a perfectly good borrower if it bases its decision solely on how much money the borrower already owes.

Debtors’ Prison

Debtors’ prison is a prison that is specifically set up for those who do not pay their debts. True debtors’ prisons were abolished in the U.S. in the 19th century. However, people are still sentenced to jail when they can’t pay certain types of debts. An example of indebtedness that may lead to jail time in the U.S. is willfully failing to pay child support arrears.

Typically, in situations concerning child support arrears, the court will hold the person in contempt of court. If he cannot come up with the money he owes by a date determined by the court, then the court will jail him for willful non-payment, and for violating a court order. Additionally, the person may be fined, or his paycheck may be garnished for the amount that he owes.

When a person’s paycheck is garnished, a specific amount, as ordered by the court, will be deducted from his paycheck every payday, until he meets the total amount owed. In the case of child support, the wage garnishment may continue in order to force him to keep up with his child support.

Early Debtors’ Prisons in the U.S.

Early debtors’ prisons in the U.S. were modeled after the debtors’ prisons that were previously established in Great Britain. Even America’s own signatories to the Declaration of Independence spent time in debtors’ prison. James Wilson spent some time there while he was still serving as one of the Associate Justices of the Supreme Court. Robert Morris spent three years in a debtors’ prison located in Philadelphia. Robert E. Lee’s father, Henry Lee III, was imprisoned in a debtors’ prison for about a year. While there, he wrote his famous “Memoirs of the War.”

Early debtors’ prisons in the U.S. were a prominent force within the country, especially after the War of 1812. Many citizens fell on hard times as a result of the war, causing early debtors’ prisons in the U.S. to be filled with those who were unable to pay what they owed. As a result of so many people being imprisoned over something so trivial, attention was now turned to the idea of debtors’ prison in and of itself. Many began to look unfavorably upon the practice.

Bankruptcy laws were ultimately amended to limit imprisonment for a majority of civil debts. Additionally, the government’s ability to imprison debtors ended in 1833, when the federal law was abolished. Now, the practice of debtors’ prisons is left solely up to the states’ discretion.

Modern Debtors’ Prison

The idea of debtors’ prison still exists, even though there are no longer brick-and-mortar buildings where people are locked away for their indebtedness. Modern debtors’ prison is a term sometimes used to refer to the practice of locking people up in a regular jail cell for their failures to pay criminal fines, or court-ordered child support.

In 2010, the Brennan Center for Justice conducted a year-long study to determine the fifteen states that had the largest number of prison inmates. All of these states also permitted the imprisonment of people who either failed to pay their debts or failed to appear at hearings related to their debts. The study also determined four factors that contribute to citizens being locked up in modern debtors’ prison:

  • State laws – may allow for citizens to be arrested and imprisoned for failing to pay fines or fees associated with a criminal case. While the citizen is considered to be in contempt of court and not technically in violation of the state laws that would keep him out of debtors’ prison, he would still be released immediately upon either paying his debt or providing adequate proof that he is unable to do so.
  • Voluntary jail time – Citizens may choose to serve a jail sentence voluntarily. Under certain state programs, choosing to serve jail time is a way for debtors to pay down their court-imposed debts.
  • Criminal case debts – Some states may arrest citizens for debts related to a criminal case, before the debt-related hearing date. States do this as a way of ensuring that those citizens do, in fact, show up for their debt-related hearings.
  • Child support arrears – The law here is sketchy, as it is technically justified by the idea that the person is not being imprisoned for the debt that he owes, but rather for disobeying the court’s order to pay the debt, whether he is able to pay the debt or not.

Indigent Indebtedness Example and Debtors’ Prison

In 1969, a man by the name of Tate had accumulated traffic fines totaling $425, on nine separate convictions. Tate was poor, and couldn’t afford to pay the fines. According to Texas law at the time, the judge sentenced the man to 85 days on a prison farm, where he could work off his indebtedness to the state at the rate of $5 per day. Not only did this seem to discriminate against the poor, who are the only people likely to be locked up for failure to pay fines, but the traffic court actually had no authority to sentence anyone to jail.

After Tate had served 21 days of his sentence, he appealed his sentence to the county, and then to the state courts, claiming that it was unconstitutional. Both appeals were denied. The matter went before the U.S. Supreme Court, which considered the question of whether allowing people of means to simply pay a fine, while locking others away, simply because they are poor and cannot pay.

The Supreme Court held that, as the state of Texas had enacted a “fines only” law for traffic offenses, it cannot impose such a fine as a punishment for those who are willing and able to pay it, only to automatically convert that fine into a jail term because the defendant is indigent, and unable to immediately pay the fine.

The Court also recognized that, while Tate’s labor was ostensibly forcing him to pay his fines, putting monies he earned each day into the state’s coffers, the opposite was true. The state was actually spending money by feeding, housing, and supervising Tate for the length of his imprisonment. The Supreme Court ultimately reversed the decision made by the Texas Court of Criminal Appeals, declaring that the law allowing the state to hold Tate in prison was, in fact, unconstitutional.

Related Legal Terms and Issues

  • Arrears – The collective monies that are owed and that were due at an earlier point in time.
  • Debt – Money that is due and owed.
  • Signatory – A party who has signed an agreement.

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