Is it Moral to File Bankruptcy?

I am a religious person, and I live in a community of religious people. As a lawyer, I enjoy the distinction of being in the one profession that is universally condemned by pretty much all religions, but despite this, I actually care a great deal about whether I am honest in my dealings, keeping promises, acting fairly, avoiding selfishness, contributing to society, and similar things. Like many of the good people among whom I live, if I were to suffer a financial reversal to the point where bankruptcy became a viable option, I would have to grapple with some serious moral questions, and those questions would go a lot deeper than whether bankruptcy would affect my credit or affect how people think of me. Obviously I hope to avoid that situation, but for those who are in the thick of it, I hope these thoughts may be helpful.

The Trapped Debtor Problem

Every society has to deal with the fact that people can get so deep in debt that there is no way out, or close to no way out. This can occur in a myriad of situations, ranging from situations where the debtor is totally at fault to situations where the debtor has no fault at all, but there is no getting around the fact that this situation exists. Many ancient societies punished failure to pay debt harshly, with punishments ranging from imprisonment to slavery and even to death. However, even the harshest of these societies recognized that allowing this without restriction was bad for society, would make the poor and their families poorer in a never-ending cycle, and in many cases would turn good people into criminals. As a result, ancient kings, such as those in ancient Babylon, would occasionally decree at some random time that all debts were to be forgiven and all property returned to the original owner. This could be as harsh on creditors as the other laws were on debtors, especially as it came at unpredictable times, and could easily turn an unsuspecting rich person into a poor person at the snap of a finger, and then make that person subject to all the harsh laws against debtors.

Moses on Debtor-Creditor Relations

One set of ancient bankruptcy laws that I have always found intriguing is found in the Old Testament. Moses commanded his people to forgive debts every seven years. "At the end of every seven years thou shalt make a release. And this is the manner of the release: Every creditor that lendeth ought unto his neighbour shall release it; he shall not exact it of his neighbour, or of his brother; because it is called the Lord's release." (Deuteronomy 15:1-2 KJV). Moses also prohibited predatory lending to the poor. He commanded, "if thy brother be waxen poor, and fallen in decay with thee; then thou shalt relieve him . . .Take thou no usury of him, or increase . . . Thou shalt not give him thy money upon usury, nor lend him thy victuals for increase." (Leviticus 25:37). Apparently the giving of high-interest loans to the poor was just as much of a problem in his day as it is in ours, and Moses found it so repugnant that he prohibited charging the poor interest altogether. In any event, both this law and the debt forgiveness laws are geared toward avoiding the trapped debtor problem.

Many Judeo-Christians do not know these debtor-creditor provisions are in the Bible. I find it intriguing that these laws were ever made to begin with, especially when they come from Moses, the lawgiver known for demanding justice "eye for eye, tooth for tooth" (Leviticus 24:20) and for commanding the death penalty for all sorts of offenses we now consider minor. Nevertheless, Moses's bankruptcy law was a brilliant innovation for its time. It was better for creditors, because they knew that the rule was they couldn't loan for more than 7 years and couldn't charge interest to poor people, so they could simply adjust their lending practices, instead of fearing that some king would decree their debts null and void at a random, unpredictable time. It was better for the government because they didn't have to decide when to press the reset button, because it was pressed every seven years like clockwork. It was also better for the debtors, because they knew that if they were in an unlivable situation there was light at the end of the tunnel.

Modern Bankruptcy Laws

Our American bankruptcy laws have undergone several changes. In the 1800s, there were three major attempts to create uniform bankruptcy laws, each of which was in response to a major economic upheaval, and each of which had a short life (3 years, 2 years, and 11 years, respectively). Much like the random decrees of ancient Babylonian kings, these disjointed attempts at bankruptcy laws caused uncertainty and reversals. Finally, in 1898, a uniform bankruptcy law was passed that has lasted to the present day, more than 100 years. Although it has been amended several times (the most recent big change being in 2005) the general idea has been predictable and understandable enough that lenders have been able to adjust their lending practices to account for the fact that bankruptcies happen, debtors have been able to escape impossible and near-impossible situations, and the government has been able to avoid flipping society on its head every few decades like a crazy Babylonian king. The fresh start provided by bankruptcy as it operates today is generally helpful to the economy, within limits, much in the same way freeing up a clog is helpful to a functioning plumbing system.

Chapter 13 versus Chapter 7

The question of whether filing bankruptcy is morally acceptable to you in a given situation may also depend on the type of bankruptcy that is filed. The two most common types for an individual are chapter 7 and chapter 13. The chapter 7 (liquidation) bankruptcy usually results in the creditors getting very little property, because they only get whatever non-exempt property the debtor had on the date of filing. Chapter 7 bankruptcies are available in a variety of situations, but most people would consider them most moral in a situation where the debtor is so badly trapped by debt that nothing less than a fresh start would help the debtor out. The chapter 13 (reorganization) bankruptcy provides broader and more flexible debt solutions, and is useful in a greater variety of situations. It is useful for a debtor who could barely pay the debts but needs to force the creditors to keep the interest rates from spiraling out of control or needs to force the creditors to stretch out the time. It is also useful for a debtor who could pay a part of the debts at less than full, but the debtor needs to force the creditors to work together with each other to get to a fair discount, which they will never do outside of bankruptcy. It is further useful for the debtor who could file a chapter 7 but would rather give the creditors something than nothing, and it is also useful in other situations. In any event, most people would agree, if they understood all the possibilities under chapter 13, that a chapter 13 bankruptcy may be morally acceptable in more situations than a chapter 7 bankruptcy.

Back to the Original Question

I have found in my law practice that many of my clients begin to overcome their moral compunctions about filing bankruptcy when they see the interest on their debts spiral out of control, or when wage garnishments force them to choose between paying their debt and eating, or choose between paying their debt putting a roof over their family's head. Sometimes it is preceded by a disaster like a job loss, business failure, or a catastrophic injury. Other times it is caused by a set of circumstances that the debtor could have and should have avoided, but didn't. Regardless of how they got there, they compute the numbers and they see no way out. If they have not thought about the trapped debtor problem and all the societal ills that come with it, now they are thinking about it. Usually there is some attempt to negotiate with their creditors, which fails, either because the creditors are too many, too stingy, or too indifferent. When they try to get multiple creditors to negotiate together they find it is impossible. They begin to step back and consider that if the law allows creditors to be so calloused to their plight, maybe it is not such a bad thing that the law also allows them an escape hatch. The thought of bankruptcy, the idea of a fresh start, is an enormous relief to them.

I hope these thoughts are helpful to at least some individuals reading this article. There is too much to say on the subject of morality and bankruptcy to cover everything, but I hope this article provides food for thought to help people make their own decisions about what is right in their situation.

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