Ethics Of. Bankruptcy

Baylor Business Review, Fall 2007 | Go to article overview

Ethics Of. Bankruptcy


DECLARING BANKRUPTCY IS AN ETHICAL DECISION FOR MANY, OF SMALL CONSEQUENCE TO SOME, AND DOWNRIGHT PROFITABLE TO OTHERS.

MANY OF US WILL FACE A Financial Crisis AT SOME POINT IN OUR LIVES.

CATASTROPHIC EVENTS SUCH AS FAMILY ILLNESS, THE DEATH OF THE PRIMARY BREADWINNER, THE UNEXPECTED LOSS OF A JOB, OR A NATURAL DISASTER LIKE HURRICANE KATRINA CAN ALTER ONE'S FINANCIAL SOLVENCY IN THE BLINK OF AN EYE. IN SUCH CIRCUMSTANCES ONE'S VERY LIVELIHOOD, ONCE SECURE, IS DRASTICALLY UPENDED AND LIFE BECOMES A DAILY STRUGGLE TO PAY BILLS, EVADE HARANGUING PHONE CALLS FROM CREDITORS AND PROTECT THE FAMILY HOME FROM FORECLOSURE.

Financial worries take an enormous physical and emotional toll on individuals and relationships alike. Sleep is just one more lost luxury. Self-blame is common and often leads to clinical depression. Friends and peers may become critical and judgmental of one's choices. Longtime business partnerships and marriages will sometimes falter under the constant pressure to survive financial hardship.

When presented with a financially draining situation beyond one's control, investigating bankruptcy is not only understandable, but may in fact offer the best hope of debt relief. In these cases, filing bankruptcy serves a morally correct and ideal purpose: to protect otherwise fiscally sound individuals experiencing untoward hardship from monetary ruin by providing a clean financial slate with which to begin life anew.

Consider now the opposite side of this same coin: those individuals experiencing financial hardship resulting from events within their control. These circumstances might include reckless overspending, recreational gambling, racking up additional debt after filing for bankruptcy, mishandling finances (or financial illiteracy), or simply choosing to renege on payments to creditors. At what point should ethics factor into their bankruptcy claims?

Rarely if ever, according to many economists, who point out that lenders and creditors anticipate and negotiate the risk of consumer non-payment into their loan or interest rates, thus protecting themselves should a borrower default. Because of this industry practice, borrowers shouldn't feel morally irresponsible when they stop paying on a mortgage or credit card debt. Does a 'no harm, no foul' approach to bankruptcy render the question of ethics moot?

Not so, says David VanHoose, Herman W. Lay Professor of Private Enterprise at Baylor and a professor of Economics. He supports the view that an individual entering into a contractual agreement has a moral duty to honor their obligation to the second party.

"A borrower has an ethical duty to avoid behaviors that significantly increase the probability of non-repayment of an obligation to a lender," says Dr. VanHoose. "In an important sense, a borrower is steward of the funds that the lender has made available for the borrower's use."

Professor Steve Green, chair and director of the graduate program in economics at Baylor, agrees with his colleague from a moral standpoint, but admits that it's a complicated issue when viewed from an economic perspective.

"Is it a binding promise to pay when the terms of the loan - the interest rate you pay - factors in the possibility of default? That is, if the rate you are paying in effect includes a bankruptcy insurance premium?" asks Dr. Green. "Given the widespread use of the bankruptcy provision and the easy access of creditors to borrower information, one could argue that virtually all transactions in our economy are priced this way."

That said, he concludes, "Bankruptcy imposes costs - mainly the increased difficulty of getting loans in the future, so it should be avoided for practical as well as moral reasons."

In his book, The Ethics of Bankruptcy, Jukka Kilpi remembers a time in America when items were purchased on a cash-only basis or not at all, and the use of credit was considered to be a disreputable practice by the American majority. …

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