Wouldn't they still owe interest to the banks on the money they borrowed, as well as the money they borrowed? I mean if all the money I make goes to the bank to pay off my mortgage my solution is not quitting my job, even though life is not very good under that situation.

The analogy has a lot of problems.

Imagine you got a loan to buy a bunch of laundry machines to run a laundromat. But your laundromat earns $8,000 a month, and the loan payment is $10,000.

You can decide to sink $2,000 of your personal money into the laundromat every month, or you can give up.

The business owes the money or the fund. In any case the individuals do not unless they backed it with personal collateral.