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I agree GB. Once I started actually negotiating contracts, I would get a glimpse into what my contract lawyers were doing and I have to say it was fascinating.

Note, David, the reference above is from a click through from the first article to this one on damages.

Edited by KendallJ
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I agree that this is a complex issue, which is why I suggested asking the fundamental moral question about contractual obligations before getting into the various aspects of what proper bankruptcy law would look like.

I'm not particularly getting side tracked, but rather trying to integrate what I know actually happens and think about why it would happen naturally, to try to help determine what first principles would be. I certainly want to work from Objectivist principles, but avoid rationalism by getting down to reality to confirm what I know already to be true about certain concretes.

As far as an intent to be legally bound, this doesn't seem quite right. I think it's the same sort of mistake that is made with respect to zoning, where people say that the government owes them zoning protection because when they moved in they did so with the "intent" that the neighbors wouldn't do such and such with their land. Or that the slave holders built their plantations with the assumption that the government would continue to uphold their "right" to slave labor. Or that taxation is fine and good as long as people know ahead of time that they're going to be taxed and plan accordlingly. But those aren't valid functions of government, and neither is negating contracts. It makes no difference that going into a contract agreement, the creditor knows his money *might* be forever lost by government decree later on. It's still wrong, even if the creditor was aware of the risk he would be wronged.

Good, so you agree then that it is not an issue of courts forcing the creditors to accept terms that they weren't already aware of or had agreed to. This was your previous argument. The one you give here is substantive and goes to the heart of the issue. How should the law reflect actual ethical truths. See my questions to David because I think that you both now are arguing along the same lines.

So the question comes down to this. Does the limited cancellation of certain types of debt during bankruptcy proceeding actually serve to corrupt the concept of contract?

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So the question comes down to this. Does the limited cancellation of certain types of debt during bankruptcy proceeding actually serve to corrupt the concept of contract?
I don't know what you have in mind regarding "limited cancellation", but I am guessing that you're saying that there are certain essentials which a man must have, such as a home, clothing, and work tools, so that some assets should be protected. Obviously, I'd want to know those details, but for now I think that is a small matter. The second issue, the much more important one, regards the type of debt. The common phenomenon of people willfully living beyond their means and racking up massive credit card debt, then using bankruptcy as a way to reboot and start up again is appalling. Without saying that there actually is any circumstance under which I think the concept of obligation should be set aside, it is clear that -- whatever those circumstances are -- egregious irresponsibility and evasion should not be rewarded by a get out of debt free card.

So what I've done is point to one example that I'm hoping you'll agree to, as being a case where a person's debts should not be forgiven. I'm looking for limited examples of what you consider to be unforgivable debts. If you say that you think no debt should be unforgivable, then I think we'll need to move the discussion to something broader, including criminal punishments, for example.

The reason why I don't think that debt cancellation is the best available restitution is that it is not the best available restitution. Even better than cancelling the debt is not cancelling the debt, and requiring the debtor to make regular payments of his debts. The reason why this is better is that is is closer to full restitution and satisfaction of the terms of the contract, even if it doesn't ever reach that goal.

I don't see the analogy between decisions about remedies and annihilating an obligation. Assuming that the court hasn't found the agreement to be invalid in the first place, then the purpose of the court is to enforce the terms of the agreement, which boils down to an exchange of value for value. An order of specific performance is the best remedy, which is analogous to actually paying the debt. When specific performance isn't possible, e.g. the item was destroyed, then an equivalent substitute value is ordered. So what the court is saying is "Although you wanted that car, it doesn't exist, and our judgment is that $50,000 is an objectively equivalent value", which thus completes the trade. The courts does not say "Well, since you can't deliver that car since it was damaged in a fire, we'll just cancel the obligation". Is there some other aspect of damages that you'd like comment on? I mean, there are huge areas that are worth comment on, like the question of whether punes are conceptually valid, and in general, to what extent is the observed Anglo-American approach to remedies for breach of agreement actually optimal.

I hope you weren't assuming that I had granted the validity of cataclysm as an excuse for negating obligations -- I myself am waiting for the arguments that some conditions warrant the unilateral termination of an agreement.

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In a capitalist society, while it would be the government's position to enforce the contract, it would be the responsibility of those who sign the contract to define how the government would do so. You would have a clause in the contract saying "the govt. will enforce this contract by awarding damages if the terms are broken" or "the govt. will enforce this contract by paddling your ass really hard if the terms are broken". If you don't have such a clause, then any court action to which both sides do not agree will be a violation of rights. If you do not agree to have your contract mediated by the courts, then having your contract mediated by the courts is in fact a violation of rights. Now, in our society, it is assumed that signing a contract makes it "legally binding", but in a capitalist one, making a contract legally binding requires a clause similar to the ones above as well as some form of consent by the government (and this is where Rand's funding of government by contract would come into play). You cannot use the government as an excuse for not making explicit what you are agreeing to.

I've rethought this a bit... The government does have one more role to play in the enforcement of contracts that doesn't require the aforementioned contract clause: If, for example, my contract calls for handing over a car and I have the car, the govt. can force me to hand over the car. It is only in the case where I don't have the car that the clause I was talking about is needed.

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In a capitalist society, while it would be the government's position to enforce the contract, it would be the responsibility of those who sign the contract to define how the government would do so.
There is a basic principle of law, which capitalist society depends on, and that is that contracts are enforceable. Indeed, that is the cornerstone of my argument against obligation-destruction, that it undermines the foundation of capitalist economics. Bankruptcy law in effect says that certain contracts are unilaterally extinguished by governmental fiat, and the less of that there is. So
If you don't have such a clause, then any court action to which both sides do not agree will be a violation of rights.
This means that if the remedies for breach are not definitively and explicitly addressed for all kinds of breaches, then the contract is nullified. IMO, rescission is the worst remedy, and that is what you are requiring with such a principle. I am morally certain that such a principle, were it adopted under the law, would result in a proliferation of uninterpretable remedy clauses, with both sides engaged in game-theoretic linguistic contortions so that plain-language remedies would be replaced with legalese Pig Latin remedies, in the hopes that the courts would say "Well, the language of the contract is plain, i.e. it is not plain, but we have to say it is plain so as to justify our decision, because we know that rescission is the worst remedy".
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I don't know what you have in mind regarding "limited cancellation", but I am guessing that you're saying that there are certain essentials which a man must have, such as a home, clothing, and work tools, so that some assets should be protected.

Not at all. Liquidate a debtors entire holdings. What I'm saying is that the statute only provides for the cancellation of a limited set of debt types. One would need to bear that context in mind when assessing the damage to the concept of contract. It is a small part of the bankruptcy code. Even in Chapter 7, secured debt is not cancelled.

The second issue, the much more important one, regards the type of debt. The common phenomenon of people willfully living beyond their means and racking up massive credit card debt, then using bankruptcy as a way to reboot and start up again is appalling. Without saying that there actually is any circumstance under which I think the concept of obligation should be set aside, it is clear that -- whatever those circumstances are -- egregious irresponsibility and evasion should not be rewarded by a get out of debt free card.

I agree as well. Nor do I think that bankruptcy is properly characterized as a "get out of debt free card". If you want me to admit that there is a moral hazard with bankruptcy as a form of insurance, well I'd be happy to. But this is the same sort of moral hazard that exists when one takes out car insurance and then drives sloppily. Yes, it is morally reprehensible.

The thing that you are not considering is that the same moral hazard exists on the creditor side, but in a little different form. That is, the last creditor to sell the last marginal increment of credit has the least to lose should a debtor declare bankrupcy and therefore there is a moral hazard amongts creditors. That is why creditors who are first, secure their debt and watch the ongoing credit history of the debtor much more closely. So the sellers of unsecured credit are less concerned with whether they effectively push the debtor into bankruptcy than the first creditors were. This moral hazard on the part of the last creditors to the trough is just as egregious and bankruptcy ought not to reward those creditors by necessarily trying to keep them whole, don't you think? In fact, isn't the threat of debt cancellation a deterent to those creditors who would turn a blind eye and offer more credit to their customers even when they know that their customers risk of bankrupcty increases significantly with such an offer?

So what I've done is point to one example that I'm hoping you'll agree to, as being a case where a person's debts should not be forgiven. I'm looking for limited examples of what you consider to be unforgivable debts. If you say that you think no debt should be unforgivable, then I think we'll need to move the discussion to something broader, including criminal punishments, for example.

refresh me here. I'm not sure what example you are pointing to.

As to my answer. Unsecured debt is a relatively small slice of all the debt out there. All other debt seems reasonable to consider unforgivable, and that is actually what bankruptcy does.

The reason why I don't think that debt cancellation is the best available restitution is that it is not the best available restitution. Even better than cancelling the debt is not cancelling the debt, and requiring the debtor to make regular payments of his debts. The reason why this is better is that is is closer to full restitution and satisfaction of the terms of the contract, even if it doesn't ever reach that goal..

This is called Chapter 13, and is used when the debtor has the ability to repay the debt. When I say repay the debt, I mean to keep the creditor whole. That means with interest. However, what happens when that debt load is simply not servicable? i.e. when the debtor cannot pay that debt because he cannot keep up with the interest load? That is Chapter 7, and that is what everyone is

I'm not sure how many times I need to go through the future value argument, but your example of continuing to pay even if you don't reach your goal, IS CANCELLING THE DEBT, or at least a portion of it. OK so take a total debt requirement to a series of different creditors. Restructuring that debt (reducing payments, changing duration, liquidation making a lump sum payment) IS cancelling a portion of that debt. Now, the question is how to apportion that cancellation. Your solution simply says all creditors should get a portion of it, but it does not get around the fact that you've still cancelled debt. Bankruptcy and the market say, creditors have a priority and the last to the trough may bear more of the cancellation burden up to and including total cancellation. If in fact, the sellers of unsecured debt naturally have a higher moral hazard, then the fact that they may suffer more of the cancellation burden is perfectly just.

I don't see the analogy between decisions about remedies and annihilating an obligation. Assuming that the court hasn't found the agreement to be invalid in the first place, then the purpose of the court is to enforce the terms of the agreement, which boils down to an exchange of value for value. An order of specific performance is the best remedy, which is analogous to actually paying the debt. When specific performance isn't possible, e.g. the item was destroyed, then an equivalent substitute value is ordered. So what the court is saying is "Although you wanted that car, it doesn't exist, and our judgment is that $50,000 is an objectively equivalent value", which thus completes the trade. The courts does not say "Well, since you can't deliver that car since it was damaged in a fire, we'll just cancel the obligation". Is there some other aspect of damages that you'd like comment on? I mean, there are huge areas that are worth comment on, like the question of whether punes are conceptually valid, and in general, to what extent is the observed Anglo-American approach to remedies for breach of agreement actually optimal.

This is why I asked about standard of value. "Value for value" in remedies is the first criteria used in a breach case, and is called "expectation measures." However, if it is impossible or undesirable to do so, the court may default back to different remedies designed based upon different standards of remedy. In these cases in fact, the court does say "It is impossible to restore you to the state if the other party had abided by the contract, so instead we can a) restore you to your original state before you entered into the contract or b. apply damages such that the other party does not profit from the transaction." The analogy is that Chapter 13 is the first level of remedy in bakruptcy, and Chapter 7 represents the secondary levels when it is impossible for the debtor to service the debt. If the court can change standard in a breach case, and not go off of the value for value standard, doesn't this also corrupt the concept of contract as per your statement? If not, then why does this not apply to bankruptc, as well? In fact, I would argue that liquidation satisfies the criteria of "restitution" (the debtor cannot have in any way profited if all of his assets are removed) which is the class b. above. So in fact, if all assets are liquidated and debt is refinanced in order of creditor priority (which is not done now, but should be) and no money or ability to repay is left (which is what will happen, by definition, in Chapter 7), cancellation of the remaining debt is reasonable.

The problem with letting creditors hold out to renegotiate debt after bankruptcy is not about what the debtor morally owes, but comes about through the fact that you always have multliple creditors, and you simply can't get through the bankruptcy proceeding without bringing all creditors to the table and resolving all the claims at once.

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There is a basic principle of law, which capitalist society depends on, and that is that contracts are enforceable. Indeed, that is the cornerstone of my argument against obligation-destruction, that it undermines the foundation of capitalist economics. Bankruptcy law in effect says that certain contracts are unilaterally extinguished by governmental fiat, and the less of that there is. SoThis means that if the remedies for breach are not definitively and explicitly addressed for all kinds of breaches, then the contract is nullified. IMO, rescission is the worst remedy, and that is what you are requiring with such a principle. I am morally certain that such a principle, were it adopted under the law, would result in a proliferation of uninterpretable remedy clauses, with both sides engaged in game-theoretic linguistic contortions so that plain-language remedies would be replaced with legalese Pig Latin remedies, in the hopes that the courts would say "Well, the language of the contract is plain, i.e. it is not plain, but we have to say it is plain so as to justify our decision, because we know that rescission is the worst remedy".

The fact that contracts are legally enforceable doesn't mean that you can collect your debt. There are several circumstances where a party to a contract will not get the full amount he is owed, with which I think you would agree. For example, if the party you have a deal with dies and his estate has insufficient funds to pay what you are owed, you are out of luck.

In the case of corporations, the whole issue of bankruptcy is clearly part of the terms of dealing with a corporation: they have limited liability. This means that the owner of the corporation can bankrupt it and you, the creditor, will only have recourse to the assets of the corporation. If the corporate assets are less than the debt amount, you lose. However, that was the risk you signed up for when you agreed to do business with a corporation.

The legal form of a corporation exists as recognition of a customary contractual provision that has emerged because it is useful to all parties concerned: limited liability. Is there not some sort of "limited liability" that is an implied term of dealing with individuals? I would like a lawyer's perspective on this one, if there are any out there who would care to comment.

I would contend that there are limits. Obviously, death of the contracting party is one of those, as I described above. Ailment, disability, reversal of fortune or even simple unwillingness to pay are all limits. The bankruptcy process is a way of resolving a situation where one party cannot or will not fulfill his part of the contractual obligation. The bankruptcy process determines how to pay someone at least part of his obligations when the other party cannot. Obviously, if it is simple willfulness, and the contracting party has the means to fulfill his obligations, the courts will compel him to do so. But if he cannot, what are you to do?

I would contend that virtually no one would want to sign a debt agreement if it meant that he faced a life-time obligation to pay regardless of his personal circumstances. He gets blinded in a car accident and can only find employment at a minimal subsistence level, yet he still retains over the course of his life the full value obligation of that $100,000 business loan that he personally co-signed? Or the $25,000 credit card bill that he amassed when he was able-bodied and prudently and reasonably expected he could pay off the debt?

It is in a lender's self-interest for there to be a way to liquidate an obligation, get what you can, and move on. Otherwise, very few people would want to conduct business with a lender if such recourse were not available to lift the un-payable part of an obligation.

As to the credit card deadbeats who recklessly amass debt only to get "bankruptcy reboots" every 7 years, this is clearly immoral and in all likelihood a rational set of bankruptcy laws would be far stricter and prevent those types of abuses.

I am unable to philosophically defend my viewpoint here. I am basing it on observations and recollections of financial practices of people and corporations. But I agree with Kendall that the key concept is "contract". Analysis of that concept will determine whether I am correct or a view such as David's is correct.

A contract is an obligation that arises out of trade, where each party is rationally pursuing his self-interest. "Trade", "rational pursuit" and "self-interest" are also important concepts that are necessary to understand this issue.

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refresh me here. I'm not sure what example you are pointing to.

As to my answer. Unsecured debt is a relatively small slice of all the debt out there. All other debt seems reasonable to consider unforgivable, and that is actually what bankruptcy does.

I was referring to the class of examples in the immediately preceding paragraph: people who borrow more than they can pay off and willfully live beyond their means, racking up massive credit card debt, and they deciding "Drat, gotta declare bankruptcy". I don't understand your last sentence, so let me paraphrase. "It is reasonable to consider all debts, other than unsecured debts, to be unforgivable". Before I start asking why, I want to make sure that this is what you intended.
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Though I adhere to the benevolent universe principle, I also adhere to the toast-gravitational law, which means that when stuff gets really interesting, stuff prevents me from spending as much time here as I'd like. So my responses will end up being dang shorter, and foewr for the next couple of days, than I'd like.

The fact that contracts are legally enforceable doesn't mean that you can collect your debt. There are several circumstances where a party to a contract will not get the full amount he is owed, with which I think you would agree.
Right: death is a way to escape obligations, usually people don't chose it. I think we should not invoke corporations because those involve a mixture of non-parallelisms, bad law, and metaphor. When a corporation dies, that's it, same with people. The corporation owes the debt, not the shareholder. So there's no question that in some cases a proper contract can't be satisfied literally, or even closely. My take on limited liability is that it's more like a species of privity of contract, but if you want a lawyer to address that, was can wait for a lawyer to address that.
Ailment, disability, reversal of fortune or even simple unwillingness to pay are all limits.
Uh, leaving aside the metaphysical inability to pay issues, which are still unproven, are you really arguing that if I contract to pay $30,000 at some point for some service (such as having a deck built on the house), then if I am unwilling to pay, that's a legitimate limit on a contract?
Obviously, if it is simple willfulness, and the contracting party has the means to fulfill his obligations, the courts will compel him to do so. But if he cannot, what are you to do?
What do you mean "cannot"? I don't understand those circumstances? Do you mean, if I cannot pay the debt in full then I need not pay it in part, to the fullest of my ability? When you're dead, then you clearly can't pay the debt. Can you describe what you mean by "cannot pay"? I cannot concretize that, that's my problem. I know that if I had a $10 million debt (however it came about), I could not pay it in my life. I won't conjecture how much of it I could pay, but surely I could pay $10,000 of it, slowly and surely, just by putting spare nickles in a jar. I could pay $20,000 if I didn't buy a new car. I could pay $30,000 if I gave up filet mignon and ate beans and rice. So can you explain in more specific terms what you mean by "can't pay"? For example, do you specifically mean "living at a minimum subsistence level"?

I think I addressed the issue of removing this from the statutory realm and putting it in the contractual realm: so no argument based on "Nobody would sign a contract if..." carries any weight since they still have the right, indeed I argue the personal moral obligation to have these sorts of problems addressed in the contract itself. Although I rejected Cogito's argument that leads to the conclusion that contracts that don't cover all contingencies should be invalidated, I suggest that there is a straightforward way of dealing with breach of contract and a lack of explicit statement for how to deal with it, namely enforcement of contract.

In other words, it seems to me that the issue comes down to this: if it is possible to partially satisfy the terms of a contract, by maintaining the obligation and continuing payments on the debt, is there a reason to not enforce the contract to that extent?

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In other words, it seems to me that the issue comes down to this: if it is possible to partially satisfy the terms of a contract, by maintaining the obligation and continuing payments on the debt, is there a reason to not enforce the contract to that extent?

Yes, that is what is done in a bankruptcy court.

As to the issue of willingness to pay, obviously a person must pay an obligation if he can. The court would force him to do it, in that instance. Also, to be clear, that would not occur in a bankruptcy court, but simply as the result of a lawsuit, where the one party would sue the other for payment. I wasn't implying that unwillingness to pay was a legitimate reason for not paying an obligation, only that it is a circumstance that would warrant judicial remediation.

Bankruptcy addresses the situation where a person cannot meet all of his obligations. Bankruptcy addresses the case where a person is insolvent, or his debts exceed his assets and his income is such that he cannot reasonably pay off his debts.

I made some other points in my post which, I contend, are also relevant to the discussion. For example:

The legal form of a corporation exists as recognition of a customary contractual provision that has emerged because it is useful to all parties concerned: limited liability. Is there not some sort of "limited liability" that is an implied term of dealing with individuals?
and

I would contend that virtually no one would want to sign a debt agreement if it meant that he faced a life-time obligation to pay regardless of his personal circumstances.

//

It is in a lender's self-interest for there to be a way to liquidate an obligation, get what you can, and move on. Otherwise, very few people would want to conduct business with a lender if such recourse were not available to lift the un-payable part of an obligation.

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I addressed the lifetime debt question as a matter of personal honor, pride and self-esteem. Somehow the plain logic of that - which all should agree to - got lost on the way to bankruptcy court, apparently.

Bankruptcy addresses the situation where a person cannot meet all of his obligations. Bankruptcy addresses the case where a person is insolvent, or his debts exceed his assets and his income is such that he cannot reasonably pay off his debts.

But how can anyone know ahead of time how soon, and the extent to which, a person in his lifetime will be able to repay his outstanding debts? Answer: it's impossible, which is why the only moral outcome is to enforce the contract, not forgive any debts, and insist that the debtor pay his debts to the extent that he is able as soon as he can. The difference between actually cancelling the debts, and not cancelling them, is that in the latter case the individual does everything he can to eventually repay the debt! That is simply not the same as cancelling the debt. Liquidiation of assets? Yes. Fresh start in life? No way!

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This means that if the remedies for breach are not definitively and explicitly addressed for all kinds of breaches

But why should it be hard to do this? A simple clause like "if the contract is breached in any way that has not been previously mentioned in this contract, the court would get to decide the remedy" or "if the contract is breached ... in this contract, the court will remedy it in the way so explicitly laid out by user DavidOdden in his posts on OO.net in 2007" would cover all possible breaches.

[reason for edit: finished my sentence]

[edit below]

Also, you could add a clause saying that if there is a dispute about whether or not there is a breach, the courts would decide.

Edited by Cogito
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Spano, what about force majeure? Is that a valid concept, consistent with Objectivism? Or, how about statutory limits on employment contracts? Can someone sign a contract to make himself a lifetime slave to another person? Can someone take on a debt that can never be extinguished under any circumstances for the rest of his life?

I'd never heard of force majeure before, so I looked it up on wikipedia, which says that

"Force majeure (French for "greater force") is a common clause in contracts which essentially frees one or both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties, such as war, strike, riot, crime, act of God (e.g., flood, earthquake, volcano), prevents one or both parties from fulfilling their obligations under the contract."
If I understand correctly, this is a type of clause that two parties agree to in a contract. If two parties agree that they will forgive the obligation in the event of such and such a scenario, then it is perfectly legitimate for the government to apply the clause in the case where the parties have a dispute. In forgiving the debt on the basis of the force majeure clause, the government would be doing exactly what it's supposed to -- enforcing the terms of the contract, one of which says that catastrophes cancel the obligations. Bankruptcy law, as I understand it, is different in that the government negates a contract without the consent of the creditor, and that's what I see as illegitimate.

That is, the last creditor to sell the last marginal increment of credit has the least to lose should a debtor declare bankrupcy and therefore there is a moral hazard amongts creditors.

I'm not understanding your argument here. Isn't an agreement an agreement? If I contract with you to loan you $100 at 10% interest, how does that contract have any different moral or legal standing if I was the fourth person to loan you money rather than the first? You agreed to repay me, and that's that. Is it not?

However, what happens when that debt load is simply not servicable? i.e. when the debtor cannot pay that debt because he cannot keep up with the interest load?

Obligation and ability to meet obligation are two seperate things, and the lack of the latter does not negate the former. If you agreed to repay me $100 plus interest, then you owe me $100 plus interest. Period. If you go broke and don't have the means to repay me, you still owe me $100 plus interest. If I take you to court to get my money back and the judge directs some sort of payment method, that is only valid insofar as it is a means of enforcing the contract. He cannot say "pay 5 payments of $10 and you're off the hook." That would be contract negation, not enforcement.

Edited by Spano
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But why should it be hard to do this? A simple clause like "if the contract is breached in any way that has not been previously mentioned in this contract, the court would get to decide the remedy" or "if the contract is breached ... in this contract, the court will remedy it in the way so explicitly laid out by user DavidOdden in his posts on OO.net in 2007" would cover all possible breaches.

In actuality this is exactly what is done. I have yet to see any commercial contract that does not have a Jurisdiction paragraph which specifically states which laws of which state that the contract will be adjudicated under. So what is not explicitly called out in the contract reverts to the laws of that state to determine.

The argument for explicitness that some are making has an epistemological downfall. It is unnecessary to explicitly recreate the law when existing codes can suffice to "fill in the blanks" of a contract and both parties are ammenable to it, or where it is already implied and both parties should know this. Trying to do so is a complete nightmare. I probably approve 50 contracts per year with standard boilerplate language, and with provisions for jurisdiction. If I had to make explicit every possible contingency, it would tie up my and my lawyers time in negotiations, and I would find myself repeating the same terms over and over and over. It is simpler and much more efficient to simply have both parties agree to jurisdiction, and manage clauses by exception rather than try to recreate the law.

In the US, the Uniform Commercial Code is implicitly assumed to be the fallback law if a particular contract does not explicitly specify a particular term for any contract involving the sale of goods.

Obligation and ability to meet obligation are two seperate things, and the lack of the latter does not negate the former. If you agreed to repay me $100 plus interest, then you owe me $100 plus interest. Period. If you go broke and don't have the means to repay me, you still owe me $100 plus interest. If I take you to court to get my money back and the judge directs some sort of payment method, that is only valid insofar as it is a means of enforcing the contract. He cannot say "pay 5 payments of $10 and you're off the hook." That would be contract negation, not enforcement.

Hi Spano,

Please check out my post to David and the link I provided discussing damages. This is exactly what the court does when the meeting of obligations is impossible.

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In actuality this is exactly what is done. I have yet to see any commercial contract that does not have a Jurisdiction paragraph which specifically states which laws of which state that the contract will be adjudicated under. So what is not explicitly called out in the contract reverts to the laws of that state to determine.

The argument for explicitness that some are making has an epistemological downfall. It is unnecessary to explicitly recreate the law when existing codes can suffice to "fill in the blanks" of a contract and both parties are ammenable to it, or where it is already implied and both parties should know this. Trying to do so is a complete nightmare. I probably approve 50 contracts per year with standard boilerplate language, and with provisions for jurisdiction. If I had to make explicit every possible contingency, it would tie up my and my lawyers time in negotiations, and I would find myself repeating the same terms over and over and over. It is simpler and much more efficient to simply have both parties agree to jurisdiction, and manage clauses by exception rather than try to recreate the law.

In the US, the Uniform Commercial Code is implicitly assumed to be the fallback law if a particular contract does not explicitly specify a particular term for any contract involving the sale of goods.

I'm cool with this, if it is actually stated in the contract. If not, the court should not by default assume that this is actually what the contract writers intended.

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I'm not understanding your argument here. Isn't an agreement an agreement? If I contract with you to loan you $100 at 10% interest, how does that contract have any different moral or legal standing if I was the fourth person to loan you money rather than the first? You agreed to repay me, and that's that. Is it not?

Yes. My point is one of "moral hazard". That is, that when people know they have insurance they tend to be less careful with their stuff, or another way of thinking about is that if people have little to lose they tend to not mind taking more risk with it. In a stacked debt position (where you owe money to many people), without any sort of priority of claims of the creditors, the last guy to sell you debt may be the one that forces you into bankruptcy; however, he doesn't care about all of the other debt you had before because it's not his. He's just worried about getting his little bit back. The last creditor is motivated to issue you the debt, when other creditors wouldn't want you to take it on.

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In other words, it seems to me that the issue comes down to this: if it is possible to partially satisfy the terms of a contract, by maintaining the obligation and continuing payments on the debt, is there a reason to not enforce the contract to that extent?

OK, David, I'm going to try one more time.

Let's say I have 10 creditors to whom I owe money. I declare bankruptcy. I only have the means to pay back 10% of the debt (eating beans and rice for the rest of my life). How should that 10% be apportioned to my 10 creditors? By what standard?

Ignoring the fact that 90% of my obligation is CANCELLED, I cannot meet the payment terms of any of my loans (size of payment and payment schedule) so everyone is forced to accept a DIFFERENT repayment structure than I was a originally obligated to. This is not "enforcment" of the contract terms, but rather cancellation of most of the obligation, and awarding alternate terms in lieu of the original obligation, i.e. remedies. You are equivocating on the meaning of the obligation.

The obligation is to "repay $10,000,000 in 10 annual payments of $1,600,000", or some such thing. Anything else is an alternate obligation in lieu of the original obligation.

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Yes. My point is one of "moral hazard". That is, that when people know they have insurance they tend to be less careful with their stuff, or another way of thinking about is that if people have little to lose they tend to not mind taking more risk with it. In a stacked debt position (where you owe money to many people), without any sort of priority of claims of the creditors, the last guy to sell you debt may be the one that forces you into bankruptcy; however, he doesn't care about all of the other debt you had before because it's not his. He's just worried about getting his little bit back. The last creditor is motivated to issue you the debt, when other creditors wouldn't want you to take it on.

Lots of points in this thread to consider! I'm processing it all slowly, but wanted to react to this particular point. Wouldn't there be a way to solve this problem without bankruptcy -- say, creditors who are "first to the trough" could include in their contracts a limit on the amount of additional debt the debtor could take on? Or would such a provision be too difficult to enforce?

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Corporate debt sometimes contains just such provisions. Especially high risk corporate debt (a la a "junk bond"). It may minimize the need for bankruptcy in some cases, but it doesn't take into account every instance where someone may default on debt, only when the default is caused by the addition of additional debt.

I'd have to think about why this would or wouldn't be sufficient. (My next door neighbor is a bank VP. Maybe I'll ask him...)

More often one sees that a creditor reserves the right to reprice its debt (i.e. raise the interest rate) if it sees the debtor increasing their risk of default. Most credit card agreements are like this.

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OK, David, I'm going to try one more time.

Let's say I have 10 creditors to whom I owe money. I declare bankruptcy. I only have the means to pay back 10% of the debt (eating beans and rice for the rest of my life). How should that 10% be apportioned to my 10 creditors? By what standard?

Ignoring the fact that 90% of my obligation is CANCELLED, I cannot meet the payment terms of any of my loans (size of payment and payment schedule) so everyone is forced to accept a DIFFERENT repayment structure than I was a originally obligated to. This is not "enforcment" of the contract terms, but rather cancellation of most of the obligation, and awarding alternate terms in lieu of the original obligation, i.e. remedies. You are equivocating on the meaning of the obligation.

The obligation is to "repay $10,000,000 in 10 annual payments of $1,600,000", or some such thing. Anything else is an alternate obligation in lieu of the original obligation.

Obviously if you can't pay, you can't pay and that's just water under the bridge. Reality is what it is, so to that extent a court that cancels particular repayment terms in favor of others, is merely recognizing reality and cannot be faulted for that as such.

But where I and perhaps others see trouble is in going further than that in releasing the debtor from his obligations as well as their equivalent, which should perhaps include money damages if the adjustment of repayment terms so warrant. If anything, a debtor should end up owing more after bankruptcy, not less, to make up for having failed in his initial obligations.

The distribution among creditors in any repayment scheme is a minor issue, I think, compared to the moral importance of being committed to honoring one's promises to the extent that one is able over the course of one's life. If some creditors can objectively claim priority over others then so be it, otherwise I don't see why a simple percentage breakdown that includes repayment to everyone in part and on the same schedule wouldn't be sufficient.

Again, I ask: how can a court know today what an individual's ability to repay will be tomorrow? At best they can make an educated guess. I do not think that they can know that one could only repay 10% of his obligation over the course of his life, certainly not to an extent sufficient to release a person from his obligations.

Admittedly, this is a complex issue overall, but the moral principle seems rather simple. Forgiving debt may be well-advised sometimes, but I see no reason why doing so should not be at the exclusive discretion of the individual creditors, and the basic moral obligation of the debtor to repay as much as possible over the course of his lifetime seems just. The idea of society granting a "fresh start" at the expense of a few is simply not consistent with the principle of individual rights.

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In a stacked debt position (where you owe money to many people), without any sort of priority of claims of the creditors, the last guy to sell you debt may be the one that forces you into bankruptcy; however, he doesn't care about all of the other debt you had before because it's not his.

You probably didn't mean to imply this, but let's be clear in our use of words -- there is no "force" involved here. No creditor "forces" anyone into debt. What happens, as we know, is that a person agrees to put himself into debt by taking a loan and thereby becoming a debtor. With that in mind, I don't see why any creditor is deserving of moral blame because he happened to be the nth person to loan money to a debtor rather than the first. All creditors are interested in having their contracts fulfilled. I'm still not understanding on what basis you want to distinguish creditors in terms of their right to get their money back. They all have the same rights (unless the terms state otherwise, of course ;)).

Again, I ask: how can a court know today what an individual's ability to repay will be tomorrow? At best they can make an educated guess. I do not think that they can know that one could only repay 10% of his obligation over the course of his life, certainly not to an extent sufficient to release a person from his obligations.

This is a good point and goes with what I was saying about a payment plan not necessarily being a cancellation of debt. Making payments at a lesser rate than the original contract required doesn't mean a debtor is off the hook for the rest. Consider the case where somebody goes bankrupt and his debt is structured into payments by the judge, but who later gets back on his feet and becomes wealthy enough to repay all his previous debt. What argument can be made that he shouldn't have to repay his old debts in full now that he has new means to do so? Under current bankruptcy law, he wouldn't have to because he got a "fresh start". I have to agree with Seeker that current law, putting aside legal details, is fairly easily seen as a moral wrong.

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You probably didn't mean to imply this, but let's be clear in our use of words -- there is no "force" involved here. No creditor "forces" anyone into debt. What happens, as we know, is that a person agrees to put himself into debt by taking a loan and thereby becoming a debtor. With that in mind, I don't see why any creditor is deserving of moral blame because he happened to be the nth person to loan money to a debtor rather than the first. All creditors are interested in having their contracts fulfilled. I'm still not understanding on what basis you want to distinguish creditors in terms of their right to get their money back. They all have the same rights (unless the terms state otherwise, of course ;) ).

My bad. You are correct. There is no force involved, and I was sloppy in the use of the word.

I'm not speaking specifically of the general right to get what a creditor contracted to get. However I am speaking of the moral ranking, relative to other creditors.

Even if bankruptcy didn't exist, it is still encumbent upon a creditor to assess the risk that any debtor may default on the loan. That is basic reality, and that responsiblity does not go away. A creditor who turns a blind eye to factors that will tell him the risk he enters into in any contract is evading reality.

Consider also that the last creditor increases the default risk for ALL the creditors; however, he has no reason to care if the $10,000 he loans someone puts the $100,000 someone else loaned him at higher risk. This is the moral hazard problem. That $100,000 may have been loaned years prior when the debtor was at no risk of default. The first creditor may have been years and many decisions away from being able to predict his debtors risk of default. The last creditor is much closer and should be able to see the future chances of default much clearer.

Note, I am using "moral hazard" as a specific term. Not a reference to ethics or moral right of a contract. That might be the confusion.

I am curious how you'd answer the question I posed to David. Given that debt will end up being cancelled, how would you apportion that cancellation?

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This is a good point and goes with what I was saying about a payment plan not necessarily being a cancellation of debt. Making payments at a lesser rate than the original contract required doesn't mean a debtor is off the hook for the rest. Consider the case where somebody goes bankrupt and his debt is structured into payments by the judge, but who later gets back on his feet and becomes wealthy enough to repay all his previous debt. What argument can be made that he shouldn't have to repay his old debts in full now that he has new means to do so? Under current bankruptcy law, he wouldn't have to because he got a "fresh start". I have to agree with Seeker that current law, putting aside legal details, is fairly easily seen as a moral wrong.

It's an interesting case, but a bit of a catch 22. Set aside for a second the fact that it takes a high level of rationality to get wealthy in a capitalist society, and a high level of irrationality to go bankrupt so having these occur in one person seems highly unlikely. If the profit motive is what would motivate someone to actually work to become wealthy, what would make that person do so if he knew that all his effort would simply enrich his creditors? Answer, none. People are not motivated to work harder in slavery (and I use that term recognizing that we're not talking about actual forced slavery) even if someone has sold themselves into it. If you forgive the debt, you may create future motivation for wealth creation, and end up begrudging the fact that you forgave the debt. If you don't forgive the debt, the wealth will not have materialized for you to collect. The only way to actually collect such a debt is to promise the debtor that they do not owe any more, but then come around later and reneg (which is probably anathema to anyone who believes in the concept of contract).

Seeker, certainly a court can predict what future earnings a person will voluntarily work to earn under a lifetime debt load. The answer to that is only as much as he has to to maintain whatever meager subsitence you allow him to eek out above and beyond the debt you impose on him.

Look if you want to argue that the moral breach is criminal in nature (rather than civil) and you want to argue to bring back debtors prisons, be my guest. But if you want to keep this issue civil, and you want the debt load to remain in perpetuity, and you determine that the debtor can earn X amount so therefore he will carry a full debt load based upon that earnings potential, but should he add to that earnings potential, then he will be responsible to increase his payments to pay off his debt, it is very clear what you will end up with de facto. He will not add to the earnings potential. Why would he, if you give him the option (i.e. make it voluntary) of doing so?

Again, I have not argued that bankruptcy is some sort of moral right, just that it is hardly a corruption of the concept of contract as David Odden claims because the particular part of the code you all are taking issue with is a small part of the code, and because you all keep positing that something would happen that was significantly different without the code, than what actually happens under the code, which is simply not correct.

So you have this conundrum. Doing the properly moral thing will not get the creditor any more remedies, i.e. any more justice. It will be more punitive to the debtor, for sure. But then we are still talking about a civil matter. Note also that under this sort of punitive system the punishment for any particular infraction is inversely proportional, not to the actual magnitude of the crime (i.e. the amount under default) but to the ability (i.e. the earning potential) of the debtor, which I think would make for an interesting debate if someone argues that this would be the appropriate as a criminal matter. This would immediately strike me as non-objective punishment. It is equivalent to saying the dumber the criminal, the longer his sentence should be.

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I think I'm a little clearer about what you're getting at with the "moral hazard" idea, which seems to be that the more information a creditor has, the more he is responsible for acting on that information. The converse would be that an early creditor didn't have the information to know that a bankruptcy was coming, and is therefore more of a "victim" than the later creditors. Is that close?

If it is, there seems to be something off about the idea that obligations should be more or less enforced depending on the "you oughtta have known better" principle, e.g. "you oughtta have known better than to loan that guy money when he already had that much debt." I certainly agree that it would be irrational and immoral for a creditor to make blatantly sketchy loans such that all his debtors go broke and can't pay him back. Obviously a bad business practice.

But does bad business practice make him less of a victim? (Let us assume for the sake of argument that the bankruptcy is legitimately the fault of the debtor, i.e. he didn't get robbed etc.) The question can be generalized: is a person entitled to protection of his rights when he "oughtta have known better?" For example, say I walk down a dark forboding alley alone at night and get mugged, while you walk down a nice clean alley in daylight and get mugged. I suppose one could say that I should've known better -- but does that make me less of a victim than you, since you had no reason to see it coming and I perhaps should have? Along the same lines, should my mugger get a lighter sentence than yours, because I should've stayed out of his alley?

While I don't think the answer is yes, I'm open to argument here. Coming back to bankruptcy, the implication is that the last creditor should have his contract enforced just the same as the others, despite the fact that one could say he should've known better than to make that loan. The fact is that he made the loan, and the debtor agreed to pay him back. The promise was made, the obligation taken on voluntarily. When the debtor goes bust, he shouldn't get let off the hook because some of the creditors should've known better.

I am curious how you'd answer the question I posed to David. Given that debt will end up being cancelled, how would you apportion that cancellation?

I can't answer the question, because I don't accept your given. I'm still of the mind that no debt should be cancelled, period {edit: coercively, by the government. Voluntary cancellation by the creditor is clearly his perogative}. If that means living on beans and rice indefinitely, so be it. But supposing that a payment plan of some kind were to be directed by the judge, I'd say off the top of my head that it could be apportioned proportionately such that the more you owe to each creditor, the larger share of your payment they get. If I owe $1000 to one creditor and $19000 to another, my total monthly payment of $100 should be split $5/$95. I'm sure there are other aspects that would be relevant here such as how past due you are etc, but in general I see no reason why permanent debt cancellation is necessary or proper.

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If the profit motive is what would motivate someone to actually work to become wealthy, what would make that person do so if he knew that all his effort would simply enrich his creditors? Answer, none.

"Enrich"? I think you're mischaracterizing the creditor/debtor relationship as some kind of power struggle or hegemony, when in fact it is a trader relationship like any other. You are not "enriching" your creditor at your peril by paying back your loan; you're fulfilling an obligation you made and keeping a promise. Stripped of all the legal and economic trappings, we're talking about simple applied morality: you made a promise, and if you're rational and moral you'll do everything in your power to keep it. Making a promise has nothing to do with "selling yourself into slavery".

The answer to the above question is not "none", it's "because it's in your rational self-interest".

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