The Ethics of Bankruptcy

November 2, 2012

For most debtors struggling to pay their debts, declaring bankruptcy is a legitimate option. However, many refuse to consider exercising this important legal right for moral reasons. At its heart, they feel that bankruptcy is dishonest: a debtor borrowed a sum of money on the condition that he would repay it. Now, he’s wanting out of the deal and to keep the money he borrowed.


In reality, the morality of bankruptcy is hardly so cut-and-dried. In fact, in some situations declaring bankruptcy is the moral choice and not declaring bankruptcy the immoral one. So, in what ways is bankruptcy a moral good?


First, bankruptcy treats similarly situated creditors equally. If you owed the butcher, the baker, and the candlestick maker $1 each, it would be wrong for the butcher and the baker to each get a dollar and for the candlestick maker to get nothing. Under an orderly bankruptcy, each creditor would receive $.66, their fair share.


Second, bankruptcy ensures that creditors who negotiated for greater protection against default risk receive preferential treatment. A secured creditor should receive the benefit of the collateral that securitized his loan, such as a debtor’s house or car. Without bankruptcy, secured creditors might not get the benefit of their bargain.


Finally, bankruptcy isn’t necessarily synonymous with not paying debts in full. Under a reorganization, a debtor may extend his payments further into the future, paying the full amount owed over a longer period of time. In this context, bankruptcy is merely a forum for renegotiation, not a chance to shirk an obligation.


Bankruptcy, like life, isn’t simple. As with much of the law, a reorganization or liquidation raise challenging ethical and moral considerations. As you consider how to move forward with your personal finances, talking to the bankruptcy professionals at Fears Nachawati may help you understand your legal options. We’re ready to advise you.

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