Is Bankruptcy Ethical?

Many people hesitate to file bankruptcy because they perceive it as shameful, or shady, or unethical.

BANKRUPTCIES SKYROCKETING Bankruptcy is far more common than it used to be. For the last few years, there have been about 6,000 bankruptcy filings in the U.S. per work day. When you consider that about 32% of these cases are joint (husband & wife) filings, this means that every work day, about 7,920 people file bankruptcy, or 990 per hour. In 2011, a year before this article was written, about 67,660 persons filed bankruptcy in Georgia alone, or about 270 persons per business day. Of course, the fact that it is common does not answer the question, “Is it ethical?” one way or another. Immorality and illegal drugs are common, too, but that does not make them right. Can bankruptcy sometimes be the right course of action?

MANY TRY HARD TO AVOID IT Going bankrupt is not always something for which to feel shame. Many people filing bankruptcy made every effort to pay all their bills, perhaps even using up savings, cashing in stocks, or borrowing from their retirement to stay afloat and try to work things out first. For very commendable reasons, they may try to keep fighting to pay all their bills– cashing in their life insurance or IRA, borrowing from their 401(k), etc.. But by holding on until the bitter end, they often end up making things even harder on their families (and perhaps harm their credit far more than necessary). But there may come a time when a rational person has to admit that he cannot pay his bills, and finally do something about it.

REASONS PEOPLE GO BANKRUPT People go bankrupt because of business reverses, unforeseeable loss of job or shortened hours, unexpected high medical bills, heavy emergency expenses, natural disasters, being swindled, and a hundred other reasons beyond their control. And people also go into debt for exercising poor judgment or carelessness in spending. The total picture may include circumstances beyond your control, or circumstances well within your control, or both. Either way, if you have too many creditors hounding you for payment, and you could not possibly pay them all and still pay for the necessities of life, you need help. That is what the bankruptcy courts are for. And you may owe it to your dependents, if any, to provide a more stable home environment.

A FRESH START When Congress wrote the bankruptcy law, they did not do it to make life easy for crooks and deadbeats. The purpose of the law was, and is, to give people who are hopelessly in debt a fresh start, so they can get their feet back on the ground. They knew that very few people actually intend to file bankruptcy. The U.S. Supreme Court itself has said that a central purpose of the bankruptcy law is to “provide a procedure by which certain insolvent debtors can reorder their affairs, make peace with their creditors, and enjoy ‘a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of pre-existing debt.’” Grogan v. Garner, 498 US 279 (1991).

It is true that some people try to misuse the bankruptcy laws for selfish personal gain. For example, a young person we know commented that he intended to charge his credit cards to the max, and then file bankruptcy and walk away from his obligations, keeping all he bought. Such despicable conduct is obviously unethical.

COLLECTORS WILL HOUND YOU UNMERCIFULLY When you don’t have enough to cover the minimum payment on everything, very possibly through no fault of your own, you either get help or you don’t pay the necessities of life, and continue to get deeper and deeper into debt. We have seen countless cases where people whose debts became a problem try to make reasonable, affordable arrangements with creditors only to be slapped with sky-high interest rates, late charges, and “over-limit” fees, or even turned over to collectors. Is it right to regularly charge unconscionable interest rates and exorbitant fees to every debtor who is behind, regardless of the reason? When collectors garnish up to one quarter of a debtor’s wages, which the courts allow here in Georgia, the debtor loses up to one quarter of his ability to pay for the necessities of life for his family all at once, all for past-due credit card charges or some other less pressing matter.

When there is not enough money to pay for your necessary expenses (housing, food, utilities, car, etc.) and also all other bills, then you need to prioritize, and pay the necessities first. Unfortunately, the collectors don’t see it that way. They are paid to pester you constantly until they get payment for their client, no matter what that does to your long-term financial security. Collectors will badger you for payment for a minor bill even if it means that paying them will make you late on your mortgage or get your car repossessed. They don’t care – they are paid to make you pay up. They have learned through years of experience that most people will pay them something just to get them off their backs, even if the money ends up coming out of the necessities. [See our sections on Fighting Bill Collectors and Dealing With Lawsuits.] Bankruptcy can get them off your back and get you some peace.

And even if a person’s credit problems are all because of previous careless or irresponsible spending, they still need to make some major changes to set things right again. If there isn’t enough money to pay all the bills, something needs to change before they can reform their ways and become responsible. Dodging bill collectors, leaving the rent or mortgage or utilities unpaid, and borrowing from Peter to pay Paul (at ever-higher penalty interest rates) is not the way to a secure future.

GOD HIMSELF FAVORS MERCY FOR DEBTORS In the Bible, God Himself commanded to give debtors relief in ancient Israel. This was to be available every seven years (modern American law allows Chapter Seven bankruptcy every eight 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 neighbor shall release it; he shall not exact it of his neighbor, or of his brother; because it is called the LORD’s release.” (Deuteronomy 15:1-2)

Also, in the New Testament, Jesus told of two cases of a creditor forgiving a person’s debt [Matthew 18:26-27, Luke 7:41-42], in the context of teaching about God’s forgiveness and our duty to forgive one another. Let us not judge ourselves more harshly than God Himself. Sometimes bankruptcy is the best way out of a mess. That’s why God made provision for debt relief for His ancient people, and that’s why the bankruptcy courts exist today. Use them if you need to.