Friday, May 22, 2015

Morality of Bankruptcy

I hear a lot of comments about the morality of bankruptcy.  Often from prospective clients who come to me for help, but hate the thought of filing bankruptcy.  They feel that they have failed if they file a bankruptcy.  They feel ashamed.  Debt collectors prey on this feeling; they threaten debtors and castigate them for failing in their responsibilities or running out on their obligations.  I find this attitude very confusing, for a number of reasons.

First of all, my prospective clients are not the only ones who need financial help!  Wall Street banks cratered our economy a few years ago, and immediately begged for help from taxpayers!  They got a trillion dollar bailout from the government, and then used some of that money to pay themselves millions of dollars in bonuses!  To this day they're getting interest-free loans from the Fed.  That Wall Street bailout cost our government and our economy a HELL of a lot more than my clients ever could!  So why is financial help ok for the big banks but not my clients?

Secondly, I see no evidence of morality anywhere else in our financial system.  Credit card companies charge 20 - 30% interest when you get in trouble; what is the morality of that?  Payday loan companies might charge 1200% interest!  H & R Block charges payday-esque interest for their short term refund anticipation loans.  Mortgage companies can't even figure out who has the note and mortgage on your house, let alone accurately apply your payments.  Why are my clients the only ones in our entire financial system who have to be "moral" by foregoing bankruptcy help?

Thirdly I often hear "my dad would never have done this".  That is probably true at least statistically.  Bankruptcy filings are higher than they were in the 1930 - 1980 time frame (depending on how old your parents are).  I think the biggest reason for that is usury laws.  After the Great Depression we enacted laws designed to protect us from another economic collapse.  Some of them limited the amount of interest a bank could charge its customers.  Your parents weren't any more financially responsible than you are, but they couldn't get into nearly as much trouble as you can given the way interest rates have skyrocketed over the last 30 years.  A big reason for the explosion of credit cards in circulation was the repeal of the usury laws.  When I graduated college in 1979 I had to beg for months to get a $300 credit limit credit card!  It wasn't profitable for the bank to manage that kind of an account.  Both of my daughters, however, received credit card solicitations while they were in college, even before they had jobs!  It is a different world than your parents' world.

Finally, is there really any immorality?  Studies show the vast majority of Americans pay debts they can afford, but not debts they can't afford.  That sounds pretty moral to me.  The prime consumers of bankruptcy in America are single mothers, people who have lost their jobs, and people dealing with massive medical bills.  These aren't people irresponsibly running up their debts and giggling all the way to the Bankruptcy Court, these are people in genuine financial need.  Compared to ancient Rome, where they could be sent to debtors prisons, our society offers people in over their heads financially the chance to discharge their debts and get a fresh start.  I don't see any immorality.  Leave the immorality to the debt collectors who try to guilt you into paying something you can't afford!

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