Bankruptcy

[KendallJ]

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.

[KendallJ]

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.

[stellavision]

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?

[KendallJ]

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.

[Seeker]

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.

[Spano]

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.

[KendallJ]

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?

[KendallJ]

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.

[Spano]

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.

[Spano]

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”.

[KendallJ]

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.

[KendallJ]

“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.

[KendallJ]

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.

[DavidOdden]

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.

[KendallJ]

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.

[Spano]

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?

[Galileo_Blogs]

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.

[Spano]

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.”

[Galileo_Blogs]

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.

[mrocktor]

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.