Wednesday, June 27, 2012

Commentary -- Bankruptcy as a Pro-active Financial Tool

BANKRUPTCY.  The word tends to conjure up images of moral turpitude, lack of character, and failure.  This attitude, though, has no basis in fact.  Bankruptcy as a legal process was well-known at the founding of our nation, and is provided for in our Constitution.  Even long before that (if one seeks counsel in the Bible), Deuteronomy 15:1 admonishes creditors that "[a]t the end of every seventh year you must cancel the debts of everyone who owes you money."  "Moral turpitude," indeed! 

The economic climate since 2008 has wreaked havoc on the financial stability of most of our citizens.   The failure of our economy to sustain growth has resulted in the elimination of many good jobs capable of supporting a family, the devaluing of real estate that many borrowers were told could form the basis of an investment, and the shrinkage of many, many other financial investments made by ordinary people, under the guise that the firms handling those investments would hold the investors’ interests above all else.  As a result, way too many family homes have been lost through foreclosure, in some instances enough to blight entire neighborhoods; retirement and other savings have been wiped out; unemployment and the inevitable credit defaults have risen to an all-time high.  The fault is not all due borrowers' unrealistic desire for "more, bigger and better."  To a large extent, much of the blame must fall squarely on the shoulders of government fiscal policy, deregulation, creditors' greed, and – well, the greed of the financial sector in general.

The promise to repay a debt is not a moral obligation, it is a contractual one, based on realistic financial considerations. It is an agreement between two parties, both of which are theoretically capable of dealing with each other as equals.  It is based on certain financial assumptions, i.e., that the parties will deal fairly and squarely with each other, that the lender has the ability to provide that which the borrower desires, and that the borrower has (and will continue to have) the ability to repay the debt according to the agreed-upon terms.  Most of the time, the agreement works out more-or-less to the benefit of both parties.  But what happens when one or more of those assumptions change?

In contract law, "impossibility of performance" may sometimes be a valid defense.  But not when applied to credit and debt collection.  What is the fate of the person who loses his job and can no longer repay the debt under the terms set by his creditor?  What defense has the small business owner whose lender, sensing a weakening economy, withdraws the line of credit, thus cutting off the business’s oxygen and leaving nothing but debts?  Under our current laws, inability to pay is NOT a defense.  The creditor retains the legal option of forcing payment, by levy and seizure of assets and wages, and in some US jurisdictions, by imprisonment.  SEE:  Debtor's Prison   
Bankruptcy provides a debtor with legal protection against the rapacious creditor who demands performance of the credit agreement despite the debtor's inability to perform.      

Make no mistake, the bankruptcy laws do not operate solely for the benefit of Joe Average citizen and his family.  Many others have filed for bankruptcy, including presidents Grant and McKinley, Mark Twain, Henry Ford, Walt Disney, and numerous other well-known and respected people.  Bankruptcy relief has also been sought and granted to some of the nation's largest corporations.  Can any one name a major airline carrier that hasn't been in and out of bankruptcy at least once?  Chrysler, CITgroup, Trump Resorts, the Philadelphia Inquirer – all have petitioned for bankruptcy relief recently.  It was once said that "what's good for GM is good for America" – and bankruptcy restored GM to financial health.  THAT is the purpose of bankruptcy.    

The recent economic crisis has been like a tornado tearing at our financial expectations, and it has taken its toll on everyone, big and small.  Many feel that the worst is over, and recovery is on its way.  One of the first tasks of recovery, though, is to clean up the debris left in the wake of the disaster.  Part of preparing for a new financial future is jettisoning the oppressive and useless burden of old debt.  Once unencumbered by the global excesses of the past, one can move forward into a brighter future.  Bankruptcy is the legal tool specifically designed for that task.
Bankruptcy --  moral turpitude and failure?  Not at all!  In the right circumstances, it can be sound financial strategy.