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Thoughts on Bankruptcy and Morality

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I've never known a person who believed that declaring bankruptcy was an easy solution to their problems. I have never heard anyone suggest that bankruptcy should be used as a tool to intentionally shaft creditors out of spite, or to gain power. Nor have I come across anyone who garnered some sort of perverse pleasure in leaving legitimate creditors, be they large companies or individuals, to twist in the wind.

What I have seen is honest, hardworking people from all walks of life: young, middle aged, or nearing retirement age, who stay trapped and buried under a mountain of debt out of a sense of honor and duty to repay it, even with very little prospect for doing so. These people cannot progress in their lives. Their families are strained, their health is often compromised. They have no choices in their lives because of the debt and they are, in effect, slaves to it. Many may slave for years.

These are people who believe declaring bankruptcy is morally wrong. Who do everything in their power to pay their bills and take care of their families.

Until one day, something happens to make it impossible for them to continue to serve the debt. Sometimes a new crisis occurs, such as the loss of a job, a health problem, an elderly parent needing help, a natural disaster, or other calamity. In some cases, that event is the creditor's demanding higher interest rates, fees, or minimum payment amounts, despite a person's diligence and timeliness in making their monthly payment, which pushes the debtor to the breaking point.

Any number of things could become the "straw that breaks the camel's back" which eventually lands the debtor in a bankruptcy attorney's office feeling defeated and humiliated.

How did bankruptcy become an issue of morality? Well, most US citizens are Christian or have hailed from a Christian, or other strong religious tradition, which teaches a high regard honesty and integrity in one's dealings with others. The Psalm 37:21 seems to make a pretty blunt case against the morality of the bankruptcy option: "The wicked borroweth, and payeth not again" (Psalm 37:21). Pretty strong deterrent for the faithful, wouldn't you say?

But what of the idea of being enslaved by debt? Is this any more morally correct? Especially when creditors have had free reign to pile on additional fees and ever increasing interest rates for so long.

Returning to scriptural reference, the writers of the Old Testament recognized and warned against the imbalance of power between a creditor who has it, and debtor, who doesn't. Deuteronomy 15:1-11 enacted what is essentially the first bankruptcy law. It states that at the end of every seven years, debtors must cancel debts. In 1800, Congress used this as the basis for the first bankruptcy statutes when it said that a person can file bankruptcy every seven years.

Modern bankruptcy laws propose to alleviate the imbalance of power between the debtor and creditor by sheltering debtors and their families through a series of protections, including the discharge of debts and the ability to exempt certain property from creditors.

Bankruptcy does not forgive debt. It grants a discharge to the honest but unfortunate debtor. There is a significant moral difference. A discharge simply prevents a creditor from enforcing the debt against the debtor, as in a forceful taking of the debtor's property. There is no proscription against a debtor repaying a debt that has been discharged in bankruptcy if he becomes able to do so later.

It is unfortunate that the issue of debt forgiveness is still morally suspect. This brings about difficult policy as well as personal conflicts that are not easily resolved. Scripture does make it clear that a creditor, who is likely in a more powerful position than his debtor, should do everything possible to keep from embarrassing or crippling his debtor, including forgiving the debt. For those uncomfortable about resolving issues scripturally, the question could be settled another way, by asking: as a society, what benefit do we receive when large segments of the population are enslaved to smaller, but more powerful ones?

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