Is it moral to allow people to discharge their debts or even restructure it?
asked Jan 27 '12 at 11:37
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.
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.
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.
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.