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Is it moral to allow people to discharge their debts or even restructure it? |
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Yes, bankruptcy is moral. Debt is granted under contractual terms. A lender should do the best they can to loan only to people who they believe can repay that debt. If a borrower ends up not being able to repay, that should become a cost of doing business -- which is effectively what happens through bankruptcy. From the borrower's perspective, they may undertake debt with the full intention and ability to repay it. But if something unexpected happens that prevents them from doing so (illness or injury to family or self, long-term job loss, their industry gets off-shored, etc), then it's moral to go bankrupt and have the courts restructure their debt. UPDATE There's a difference between fraud and legitimate bankruptcy. If I enter into a lending agreement with no intention of paying the loan back, then I am committing fraud and should not be eligible for protection from my creditors via bankruptcy. Similarly, if I lie about my assets or income, either while applying for the loan or while filing for bankruptcy, I am also committing fraud, and should be prosecuted, not protected. If I borrow $300K and can no longer repay, the usual case is not for the courts to simply dismiss the debt. In most situations, lenders would only loan such an amount if there was also some form of collateral. So if I default on the loan, the lender gets their collateral back. Unsecured loans have a higher interest rate because the lack of collateral means there is additional risk of loss for the lender. What is the alternative to bankruptcy? If a court was to issue a judgement that you must pay when you are unable to do so, what does that really mean? What happens to penalties and interest over time? If you still don't pay, then what? Prison? The police come and break your legs? If a lender can get the court to be their strongman in the event of a default, what incentive do they have to lend prudently? Why not just hand money out to whoever is willing to sign the contract, under whatever outrageous terms you can, and then use the force of government to get them to pay. Is that really much different from a loan shark? In the long-term, is a contract valid that potentially ties you to a lifetime of debt that you can never repay? Sounds like a form of slavery to me. Even if you willingly signed it, a contract that violates your rights should not be legally valid. What principle are you using to back this up? Morality is contextual, not absolute. Morals guide you toward life and happiness, not misery and perpetual slavery. If I don't have a duty to give you $50K just because you suffered an illness, why do I have a duty to forgive your debt of $50K just because you suffered an illness? When you loan me $50K, you also accept the risk that I may be unable to repay. You can control your level of risk through careful screening and perhaps by requiring me to purchase insurance or put up collateral. Having the possibility of loss is a crucial component of prudent lending (a situation that's compounded with fractional reserve banking, where lenders create money to be loaned from thin air). The lending process is much different than you making a claim on my assets without having a contractual agreement between us. Taking the risk that someone is unable to pay and having the government come in an say you don't have to repay it (even if you later gain the ability to pay, e.g. even if you later hit the lottery), are two very different things. Prison and the breaking of legs are strawmen. Sending someone to prison, or breaking their legs, is not going to help someone who is currently unable to pay you back, to become able to pay you back.
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A proper society definitely would have bankruptcy laws, but they would be very different than those we have today. It is simply a fact that some people reach a point where they cannot meet all of their debt obligations. At that point, we must do something, and bankruptcy laws would define what that something would be. However, they would not require forgiveness of the debts as current bankruptcy laws do. The debtor owes the creditor the money, and it would be a miscarriage of justice and a violation of the creditors rights for the government to simply declare that the debtor owed him no more. But if the debtor has nothing at the time of bankruptcy, you cannot demand immediate payment ("you cannot squeeze blood from a stone"). Instead, the laws would set up an equitable scheme that restructures the monthly payments the debtor is required to pay to each creditor such that (1) the debtor retains enough of his monthly income to be able to continue living his life and (2) the creditors are able to get paid (albeit at a later date than they previously anticipated--note that any loss due to time-value-of-money will be compensated by accruing interest on the debt). For example, Debtor owes three creditors a total of $300,000 with monthly payments on the debt being $2000. Debtor, however is only making $2200 per month, and has no other wealth. Obviously, Debtor cannot pay the debts and continue to live. Current bankruptcy law would simply forgive the debt. The law I propose would do something like change the monthly payment scheme such that Debtor would have to pay $1000 per month to the debt until all the debts are fully paid, and would thus have enough left over to live on. I must disagree strongly with Rick's justification for current bankruptcy laws. As I understand his argument (correct me if I am wrong), he argues there is nothing wrong with wiping out debt because its "a cost of doing business" and creditors "accept the risk." Try applying this principle to other rights violations: I can breach my contract with you and you have no recourse because you accepted the risk that I would breach; I can refuse to give you goods that you purchased from me because you accepted the risk that I would defraud you; you have no claim against the mugger because you accepted the risk of being mugged when you walked in the dangerous neighborhood; etc. The point is that all human activities have risks associated with them, but this fact does not mean that we lose our claim to protection from the government. We do accept the risks, but we accept them subject to the understanding that there will be a remedy if the risk eventuates. UPDATE I realized there is a different way to read what Rick is saying. If he is answering the question of whether it is moral for a person to avail himself of the current bankruptcy laws (rather than if the laws themselves are moral), then I tent to agree with him. The laws are what they are, and if you simply cannot pay your debts then you have no choice other than to use whatever bankruptcy laws are available to you. In such a case, however, morality would demand your scrupulous honesty: i.e., no trying to hide value in the bankruptcy estate ala million dollar homes in Florida that cannot be reached by the creditors or the like--technically legal but obviously dishonest. The fact that companies know about the current bankruptcy laws and "accept the risk" by dealing with you nonetheless might also make you feel better about your choice, because you will know that you are not completely blindsiding them. But I must reiterate that when it comes to justifying the law itself, such considerations are not relevant. I'm not an expert on current bankruptcy law, but my understanding of it is that the courts do attempt to reschedule the debt, before resorting to dismissing it. That's why I said "restructure their debt" in my answer. One of the moral issues related to bankruptcy is whether a contract that effectively binds you to a lifetime of debt service can be valid. Chapter 11, which is for for corporations only, involves restructuring. Chapter 7, which is available for individuals, and which constitutes 99% of bankruptcy cases wipes the debt clean. Chapter 7 is not 99% of individual bankruptcy cases. More like 67%. The vast majority of the rest are Chapter 13, which is restructuring. Anyway, I think you're right, at least before your update. A proper society certainly would have bankruptcy laws, as bankruptcy laws are there in large part to protect creditors. This is why creditors can force people into bankruptcy. The idea is that if someone has defaulted on their debt payments, bankruptcy can distribute what's left in a way that is fair to all creditors, instead of the consumer choosing to pay some debts and not pay others. The problem, I think, is that someone can get a discharge in bankruptcy one day, hit the lottery the next day, and doesn't have to give any of those lottery proceeds to the former debtors. It might make sense in some cases to just divide up someone's assets and give them to the debtors, rather than restructuring their debt in a way which might allow the debtor to just get in more trouble. But there should be a way to reopen the case if the former debtor later obtains enough positive net worth for it to be worthwhile. (Current creditors would obviously have to have first claim in such a case.) You are correct, I was using hyperbole with the 99%, and you are right to call me on it. If we want to be exact, the number I found from the US courts website is 72% for 2010. Regardless, my over-exaggerated point was that the majority of bankruptcy cases are Chapter 7, and when most people think about "bankruptcy" they think chapter 7. Now that I think about it, I am essentially advocating a slightly modified version of what currently is chapter 13 (but without the 3/5 year limitation and without the debtor being able to shelter existing wealth). I agree with much of what you say anthony, but why merely give the creditors first claim when a debtor hits the lottery post-bankruptcy? What if its not the lottery, but he simply gets a good job and has a solid income--should he not repay the debt he owes? I suggest setting up the system such that debtors pay what they can as they can (as determined by the court). Obviously, if the debtor had no income, then the garnishment would have to be held in abeyance until such time as he was able to pay, but a court could address this on a case-by-case basis. Rick: I see your concern about life-long debt, and I acknowledge that it is troubling. My response, however, is that people obligate themselves for a lifetime in many other areas, and we haven't seen terrible consequences from it: a 40 yrs old who takes a 40 year mortgage on his house is indebted himself for a lifetime, people buy life-time leases of property, people contract to pay other people specified sums for the rest of their life (e.g., some divorce settlements), etc. If the debtor hits the lottery and can pay all his debts, he should. My point about "first claim" was to introduce something similar to "debtor-in-possession financing". However, that's just a detail which perhaps I'm not even correct about. I think we agree on the principle, which is that the purpose of bankruptcy ought to be solely to maximize the amount that creditors can expect to get back, and, if it falls short, to split that amount up fairly between them. If some of the contracts are not legally valid, that is a completely separate issue. As for whether or not it is moral for a person "to avail himself of the current bankruptcy laws", I'm not sure I even agree with that. If you have your debts discharged in chapter 7 bankruptcy, and then you hit the lottery, I think you generally ought to pay off the discharged portion of your debts. What I do think is moral is to negotiate with your creditors, to convince them to agree to cancel a portion of your debts.
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