The American Constitution provides that Congress has, as one of its specifically stated general powers, the ability to create “uniform laws on the subject of Bankruptcy throughout the United States.” Thus, the ability to file a bankruptcy case was set forth by the founding fathers as something for Congress to provide. The bankruptcy laws were intended to foster the development of commerce. It also prevented individual states from enacting laws creating inconsistency and confusion.
In Deuteronomy 15, there is some discussion about a release from debts to be had after seven years of attempting to re-pay a debt. It seems that this was looked at as an obligation of the creditor as much as a release of the Debtor. This is not to say that the bible necessarily encourages bankruptcy but it does seem to allow for a discharge of debts, particularly in circumstances where debtors have made an attempt to repay the debts.
It is also important to consider other obligations provided for by the bible and in virtually all religions and cultures. For instance, one’s obligation to support one’s family would seem to outweigh the duty to re-pay debt. It seems that one would be entitled to seek legal forgiveness of debts in situations where it is appropriate. Bankruptcy laws, together with state exemption laws provides a framework for helping to determine what is reasonable. If your situation justifies bankruptcy relief pursuant to the law, then this may provide some guidance that it is morally acceptable.
Bankruptcy can be considered a means to balance the interests of creditors and debtors. It is not beneficial to either the debtor or creditors for a creditor to continue to pursue a debt that cannot be collected by any reasonable means. There is a cost to a creditor in collecting or “servicing” a debt. For this reason, creditors will reject payment plan offers that sincere debtors make.
Many creditors deal with the issue by requiring debtors to participate in credit counseling programs in order to enter into payment plans. The credit counseling organization collects information from the debtor to determine how much a debtor can afford to pay. If the debtor can pay in accordance with the guidelines a payment plan is set up. Creditors will often make “concessions” in order to allow the plans to work such as waiving or reducing interest charges, re-aging accounts to stop late charges and over-limit fees and paying the expenses of the credit counseling program from what they receive from the debtor towards their debt. If a debtors situation does not allow for the debtor to qualify for such a payment plan, then the debtor should take this as further evidence that filing is reasonable and not something to feel guilty about.
Creditors do not want to waste time and money attempting to collect a debt where there is little likelihood of success. Bankruptcy releases the debt, the creditor comfortable that collection is unlikely. The Debtor has voluntarily provided this information and the creditor need not go to the effort and expense of obtaining a judgment, only to determine that it cannot be collected.
Creditors have various means of protecting themselves, at all stages of a financial transaction and make business decisions about what risks to take in an effort to make a profit. These businesses also know that obtaining a bankruptcy discharge will likely return them as customers at some point in the future and are often a very profitable market because they typically pay higher interest. The decision to grant credit is a business decision. So is the decision as to how a debt is to be collected. A creditor is not likely to consider an individual’s situation outside of bankruptcy based on fairness or compliance with some moral code. Typically, their only concern is their business decision based upon objective factors such as the expense and likelihood of collection, perception created by settlements, future creditworthiness etc. Issues of fairness and morality are unlikely to enter into their decisions. Taking advantage of the laws that are available to protect you is one form of taking responsibility.
The Bankruptcy Court also promotes fairness among the creditors. Sometimes a bankruptcy filing has the effect of ensuring that creditors are treated fairly, at least in accord with the priorities set up in the bankruptcy code. For instance, debts to pay child support and alimony are among those debts given priority under the bankruptcy code. This means that a debtor can, under the law, as well as morally obtain a discharge of other debts in order to maintain the ability to meet his family law obligations such as child support and alimony. A bankruptcy filing also helps right the situation where a creditor is rewarded for being aggressive. The state collection laws encourage a “race to the courthouse” mentality because creditors rights to debtors non-exempt and unpledged assets is determined based upon who obtains and perfects their judgment first. The aggressive creditor is also awarded outside of bankruptcy because often a creditor is able to badger, harass, threaten, browbeat, frighten or browbeat the debtor into payment just to get the creditor off his back. The filing of a bankruptcy in this situation would not only prevent the aggressive creditor from benefitting from his poor behavior but it will also ensure that reasonable creditors do not get penalized for behaving appropriately. Thus, bankruptcy is a means to help impose fairness not only between the debtor and his or her creditors but also between the creditors themselves.
Often, allowing a debtor a discharge is in the best interests of both the debtor and the creditors as an expeditious manner to resolve the situation and allow all of the parties to move forward. In the instances of businesses, the economic situation of a business or an individual is rendered viable by the filing of a bankruptcy. It can serve to reorganize the affairs of a debtor or business to the benefit of the debtor, employees, vendors and customers who would prefer the debtor remain in business and recognize the futility or unprofitability of moving forward mired in unproductive debt. Creditors would rather accept lesser amounts to maximize their return and preserve the debtor who can recover as a future customer.
Finally, there is nothing that prevents a debtor from re-paying a debt in the future if they become able to do so without burdening themselves. While a creditor may not attempt to force or perhaps even encourage a debtor to repay a discharged debt, a former debtor may choose to do so voluntarily at any time.