Bankruptcy

Why People Should Be Allowed to Walk Away from Their Debts

By Mechele Dickerson

Professor Heidi M. Hurd, a law and philosophy professor at the University of Illinois, ended the conference by discussing first principles in The Jurisprudence of Bankruptcy. Why should we forgive people who break contracts and harm others?

Professor Hurd rejects the typical paternalistic, utilitarian, and other rights-based justifications for allowing people to walk away from their debts.  For example, she recognizes that the rehabilitationist nature of bankruptcy can possibly be justified based on theories of distributive justice (which seeks to move things from the haves to the have nots), though she ultimate rejects this theory.  Her paper recognizes that rejecting these theories might result in the financial acquittal of the guilty (for example, credit card issuers who are morally implicit in causing debtors to incur so much debt) and the punishment of the innocent.

To Professor Hurd, debt forgiveness is about personal virtue ? not the virtue of individual debtors or creditors, but the virtue of citizens of a wealthy society.  Allowing bankruptcy to exist, she argues, is required by persons of good character who live in a world with others who have varying talents and resources.  As members of a virtuous and wealthy society, we should be willing to bear the losses of our fellow citizens because doing so constitutes an essential component of being a person of good character.  The existence of a bankruptcy system helps each of us realize our individual virtues in the collective.

Professor Curtis Bridgeman, a law professor at Florida State University, challenges Professor Hurd?s first principles. He questioned whether we have individual moral obligations to forgive debts, especially if the consumer might be able to repay their debts from future earnings. He thinks that debtors have obligations to their creditors and only they ? not us as individuals collectively ? cannot forgive debtors.

Professor Bridgeman conceded that creditors aren?t the only ones who have an interest in the debtor?s bankruptcy, since states also have an interest in the system. He argues, though, that the state?s interest would give individuals the right to collectively decide only whether debtors could discharge tax debts, since those debts are the ones ostensibly owed to all of us.

Full post as published by Credit Slips on May 05, 2008 (boomark / email).