Bankruptcy

Why We Have Bankruptcy Laws

Article I, Section 8 of United States Constitution gives Congress the exclusive power to regulate interstate commerce and the exclusive power to establish “uniform Laws on the subject of Bankruptcies throughout the United States.” These two powers of the national government have ensured the free flow of goods and encouraged the innovation that created the American economy.

The most common argument in favor of bankruptcy law is that it offers a fresh start to people. It does the nation no good to put someone in debtors’ prison. A social net may be necessary so that people do not sink into a life of despair useless to themselves and society. Moreover, bankruptcy is not something that can be insured against in the way drivers or homes are insured.

Bankruptcy is sometimes in the interest of the creditors. Rather than each creditor racing to take possession, often duplicating the efforts of each other, bankruptcy provides an orderly method of liquidating the debtors assets obtaining their maximum worth at the least expense to creditors. Some argue that bankruptcy puts brakes on creditors overextending credit by bringing home the point that they might not ever be paid back.

Some might argue that discharging debt is a moral or religious obligation. Bankruptcy might not be the result of irresponsible spending but market conditions or calamities. One can also argue that an individual creditor generously forgiving a debt improves his or her character.

A very common theory is social peace. A permanent class of debtor and creditors could divide and destroy a nation.

On the other hand, some argue that bankruptcy induces fraud. People might look for the easy way out. They will spend irresponsibly knowing that they can file for bankruptcy. Adding to this concern, some claim that bankruptcy has lost its social stigma making people less reluctant to file.

Despite the disagreement the vast majority of experts agree that bankruptcy laws are necessary. The debate is really over when, who and why.

"On Bankruptcy" (1937 translated from French)

A rapid glance at history is enough to show the subversive role consistently played, ever since money existed, by the phenomenon of debt. The cancellation of debts was the principal feature of the reforms of both Solon and Lycurgus. And later on the small Greek cities were more than once shattered by movements in favour of another cancellation. The revolt by which the Roman plebeians won the institution of the tribuneship had its origin in a widespread insolvency which was reducing more and more debtors to the condition of slavery; and even if there had been no revolt a partial cancellation of debts had become imperative, because with every plebeian reduced to a slave Rome lost a soldier.

The payment of debts is necessary for social order. The non-payment of debts is quite equally necessary for social order. For centuries humanity has oscillated, serenely unaware, between these two contradictory necessities. Unfortunately, the second of them violates a great many seemingly legitimate interests and it has difficulty in securing recognition without disturbance and a measure of violence.