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stellavision
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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?

I think you are starting to get it. Please understand I am not in any way minimizing the primary ethical responsibility of the debter. But since it is possible to apportion responsibility legally and since courts do that in civil trials, then shouldn't it be a factor in looking at which creditors might bear a little more of the responsibility than others, not relative to the debtor, but to each other. Also, I'm trying to help people understand why it is that creditors might have sqaubbles amonst each other that would tie up the courts regarding priority of claims. I think this shows it. The fundamental, primary purpose for bankruptcy is to adjudicate the proceedings in a an orderly fashion and to apportion the claims of creditors in a rational system. While I can see the valid argument to keep all debt in place and let the creditors sort it out, I can easily see assets being eaten up in the legal proceedings so that by the time everyone is done, the creditors ended up with nothing anyway.

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. 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.

Yes, I understand you don't accept the given. At the same time no one seems to admit that restructuring the debt on an ability to pay basis, necessarily cancels debt, at least some of it. I think it's still a valid question even if we take your basis for argument, but no one wants to recognize that. It's basic finance. You can claim the debt is "still there" but if you resturcture it, part of it really isn't there any more.

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"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".

You missed my point, and allowed yourself to be distracted by word choice. Enrich = "flows to". That's all it means. You read it as meaning "unjustly flows to". I gave it no such connotation.

But your answer misses the point. How can it be in my rational self interest if you've taken away the reason it is in my self-interest? Earning money is not in my rational self interest in every context. That's intrincism. The reason I work to become wealthy is because I stand to gain from the effort of my mind. If you take away that possibility of gain, you also take away the rational self-interest.

It is the same thing as a Communist treating productive capability as a static quantity and the profit motive as unnecessary to production. Unless I stand to make some sort of added gain from added effort, I won't make the added effort.

Edited by KendallJ
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Just as a side note, I just looked up the means test for Chapter 7 bankruptcy, which is what everyone is annoyed with. Remember Ch 13 restructures the debt so that the debtor still bears the debt load. I used this article.

There is a means test for ability to file Ch. 7, if your income is over the state median (this I highly disagree with. The test should apply to all. But this isn't about debt forgiveness, it's socialistic bull).

You cannot file Ch. 7 as an individual if you earn more than $120K/yr.

You cannot file Ch. 7 as an individual if your aggregate montly income is > 25% of your non-priority unsecured debt (this is usually lines of credit such as credit cards).

Let's take the worst case. I earn 119,999$/yr. I can file Ch. 7 if my unsecured debt is >$40,000. My secured debt can be anything, but then this debt doesn't necessarily get cancelled, so it's not the issue.

How did I get to 40K$+ in unsecrured debt load? Well, if you take the credit card example, it's highly doubtful I can get a single credit card with a credit limit of $50,000 on it given my salary, so this means that even for me to rack up that amount of unsecured debt, there must be multiple creditors. Yes, I'm sure I can obtain multiple credit cards with multiple companies, but not without them knowing it, and not without them turning a blind eye to my credit position. I would submit that there is some moral hazard going on here, and it might be the case that somone who knows it and still submits to it is either partially to blame or already being fairy compensated through interest for it. Note also, that if I obtain this credit limit fraudulently, then this debt is not cancelled.

Again, I am not making the moral argument, simply the argument that when you look at it, I am unconvinced that you are really corrupting the concept of contract. Take out the socialistic crap (means test for all, and remove "exempt" property). Sure, I would advocate that, but to have enough debt on top of the 40K in unsecured to declare bankruptcy given my salary, that means that the chances that unsecured would have something left over after the secured debtors renegotiate is pretty suspect. I just don't see it.

Edited by KendallJ
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Kendall,

What, in your opinion, is the proper statement of the required bankruptcy law? I'm more interested in the highlights, not a finely-worded code. If, for example, you're happy with Title 7, then you can just say that, or if you like Title 7 but would remove all survivability exceptions such as real estate liens, child-support, student loans, you could say that. Since you claim that there are circumstances under which a court should order across the board rescission of multiple contracts beyond impossibility of performance, I want to know what those circumstances are. Before trying to guess whether the conclusion is justified and by what, I think we need to know what you claim is justified.

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That's a good point.

The concept of Chapter 7, i.e. liquidation to pay off debts is proper I think.

1. Ch. 7 must have some sort of means test applicable to all, equally. That is, Ch 13 is the preferred route unless it can objectively be shown that the chances of paying off the debt are slim. We can debate how lienient or harsh that hurdle should be, but the concept is that this is not for cases where someone wants to escape from debt. If someone can effectively resturcture their debt and pay it off under Ch13, that is the way to go.

2. I would remove all exempt property. Liquidation should be down to the clothes on your back.

3. Debt cancellation should be in order of priority as the market would have it determined. That means that non-priority unsecured debt would be first on the block. We can debate where to stop, and I don't have a particular idea here. However, secrued debt should stay (and it does) since it helps to determine the priority. (if your mortgage is secured by your house, then the liquidation of your house should ALL flow to the mortgage holder until the mortgage is paid off. Only then could it be used to take care of other debts. I believe that the Ch 7 code already goes in this order so this part I believe exists.

4. If you would like to say that the court has the discretion to determine where to stop in debt cancellation, based upon any "moral hazard" circumstances on the part of the creditor, then I think that has some merit. This is sort of the equivalent of partial responsibility in an auto accident. To the extent it can be shown that a creditor avoided his fiduciary responsibility to examine default risk, then he holds some sort of reponsibility in the matter.

5. Oh, regarding punitive measures. I think bankruptcy history should stay on one's credit record permanently. If there is a "natural life" to the effect of the mark on your record, then let's let creditors determine what that is.

6. I am not necessarily of making the issue a criminal one, because I think fraudulent bankruptcy already has that sort of provisions, but if someone wanted to propose a jail sentence (albeit short, say 6 mo to 1 yr) even in the case of "honest" bankruptcy, I would be open to that. Or maybe as punishment for a 2nd attempt at bankrupcy declaration.

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At the same time no one seems to admit that restructuring the debt on an ability to pay basis, necessarily cancels debt, at least some of it. I think it's still a valid question even if we take your basis for argument, but no one wants to recognize that. It's basic finance. You can claim the debt is "still there" but if you resturcture it, part of it really isn't there any more.

But restructuring doesn't necessarily cancel debt, if we're talking about temporary payment plans or somesuch. Just because the judge orders me to make reduced payments on my total debt (until such time as I can handle higher payments, at which time the plan should be changed to reflect that), doesn't mean the total debt is decreased in any way. I may be paying half of what I was supposed to be paying per month, but I still owe the full amount, no matter how long it takes me to come up with it. You seem to be equating payment rate with total debt, but changing the rate need have no impact on the total debt obligation.

How can it be in my rational self interest if you've taken away the reason it is in my self-interest? Earning money is not in my rational self interest in every context. That's intrincism. The reason I work to become wealthy is because I stand to gain from the effort of my mind. If you take away that possibility of gain, you also take away the rational self-interest.
You can argue this, but you'll also have to argue that acting on principle is morally unnecessary and that it has no bearing on a person's rational self-interest. Perhaps I'm misunderstanding you here, but this bit seems very similar to the moral position of the pragmatists, that prinicples of morality don't matter, only "what works". This seems to be the upshot of your saying that the moment paying back my obligations doesn't seem to be making me rich, I ought to abandon the idea that integrity, honesty, and productiveness should guide my actions because they "don't work" anymore. But if you agree with the Objectivist ethics that acting on moral prinicples is *necessary* to achieving one's values long term, then the act of meeting one's obligations, as an application of the virtues, is moral and therefore practical, i.e. in my rational self-interest. The converse is that abandoning at any time moral principles that support paying back one's debts is contrary to one's long term interest. Can you imagine Hank Rearden refusing to work any longer because it would take him awhile to repay his debts first? Again, to repay one's debts is to recognize the facts of reality and to place importance on virtues like integrity and honesty. It may be true that earning money isn't in one's rational self-interest in some contexts -- but abandoning moral principles is wrong in every context.

How did I get to 40K$+ in unsecrured debt load? Well, if you take the credit card example, it's highly doubtful I can get a single credit card with a credit limit of $50,000 on it given my salary, so this means that even for me to rack up that amount of unsecured debt, there must be multiple creditors. Yes, I'm sure I can obtain multiple credit cards with multiple companies, but not without them knowing it, and not without them turning a blind eye to my credit position. I would submit that there is some moral hazard going on here, and it might be the case that somone who knows it and still submits to it is either partially to blame or already being fairy compensated through interest for it.

Would you say that as a person who walks into a dark alley at night and gets mugged, I am "partially to blame" for the violation of my rights, and should therefore receive a commensurate partial protection thereof?

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Can you imagine Hank Rearden refusing to work any longer because it would take him awhile to repay his debts first? Again, to repay one's debts is to recognize the facts of reality and to place importance on virtues like integrity and honesty. It may be true that earning money isn't in one's rational self-interest in some contexts -- but abandoning moral principles is wrong in every context.

I am still thinking about this topic, particularly the key issue of whether debts should be extinguished in bankruptcy, so I will not address that issue here. Rather, I want to address a mistaken premise in the above quote. That premise is that bankruptcy solely occurs through moral failure. Clearly, that is not true. What if a debtor gets into a car accident and becomes a quadriplegic, and can no longer earn the money to pay his debt? One can think of multitudinous examples like this, with varying degrees of moral culpability. Clearly, if someone cannot pay a debt because he has become incapacitated, there is no moral issue at all in his failure to pay his debt. In this case, bankruptcy is a legal recognition of his inability to pay, and a court-supervised liquidation of his assets to pay what portion of the debt he can pay.

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I certainly agree that bankruptcy doesn't necessarily entail moral failure, and that's not a premise in my statement. What I'm saying is that when you take on a debt, you'll do whatever is in your power (quadriplegic or not) to pay it back if you're moral. Again, there is no need to *cancel* debt (coercively, by the government) in any case, only sometimes the need to recognize that the original form of repayment isn't feasible and for the next best form to be used instead. Even if I became a quadriplegic and could only earn enough to make payments of $100 a month for the remainder of my lifetime, that doesn't mean that I wouldn't owe what I did before. It just happens that I won't ever be able to repay what I owe. But the obligation is still there, and doesn't vanish when the means to repay it vanish. In other words, it could be legitimate in some cases to say "Sorry, I can't pay you back", but I don't see when it would ever be legitimate to say "I don't owe you any more."

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Even if I became a quadriplegic and could only earn enough to make payments of $100 a month for the remainder of my lifetime, that doesn't mean that I wouldn't owe what I did before.

As I said before, I am not sure whether de jure extinguishment of the unpayable portion of a debt is part of bankruptcy. Having said that, it is interesting to observe that the above example represents a de facto extinguishment of part of the debt, since the quadriplegic (in all likelihood) will not be able to pay off the full present value of the debt over the course of his lifetime (assuming the debt is large enough).

This ties in with Kendall's argument (pardon if I am mis-stating it) that any restructuring of debt involves a de facto extinguishment of part of the debt obligation. At the very least, it involves a de facto altering of the terms of the debt in a manner not wanted by the lender.

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  • 4 months later...
At the very least, it involves a de facto altering of the terms of the debt in a manner not wanted by the lender.

Ah, but there lies the essential point! Reality (be it an asteroid, a bad season or a plague of locusts) changed the terms of the debt in a manner not wanted by the lender. That is not a moral issue. The fact that the debtor can't pay according to the original terms is just that: a fact of reality. What is being contested about Bankruptcy is men (the government) changing the terms - or invalidating them altogether.

The obligations assumed when one signs a contract cannot be shed without the consent of the other party. If reality impossibilitates the fulfillment of those obligations as contracted, they don't cease to exist. If the parties can come to a new agreement as to how the obligation will be fulfilled, that is that. If they cannot come to such a mutual agreement, the government, in its role as contract enforcer, has to stipulate those terms.

What the terms should be (i.e. total or partial liquidation of assets, how much of the debtor's income goes to fulfilling his obligations etc.) is open to discussion. The obligation to fully compensate the creditor can't be cancelled by the government though. The fact that one can't (and may never be able to) pay the total does not remove the obligation to pay as much as you can, whenever you can.

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