Most people with debt problems are, at least intially, highly resistant to the idea of filing for bankruptcy. Filing chapter 7 or chapter 13 is often viewed as taking the easy way out, or looked at as a good way to ruin one’s future credit rating, or as a moral failing best to be avoided. These viewpoints, combined with financial stress and inability to pay one’s obligations, often results in a great deal of stress on persons considering bankruptcy.
The fact is that people do have pride, and no one wants to file a bankruptcy if it can be avoided. As a result, most consumer bankruptcies are filed by persons who have been bothered by collection phone call or texts or even lawsuits by creditors. In short, bankruptcies usually are filed when there is no reasonable alternative except asking the bankruptcy court for relief.
Does this mean a person gives up his or her pride by choosing to file bankruptcy? Is it really a shameful thing to do? And what standard should be used in evaluating whether filing bankruptcy is the “right” thing to do, or a morally correct course of action?
For most, it might be useful to consult one’s own sense of what are the most important obligations to honor. If a person must choose between the obligation to support one’s family, and the obligation to pay the required monthly payments on credit cards and lines of credit, it might be most reasonable to decide in favor supporting one’s family. After all, who will support the family if not the primary wage earner? Probably no one, which would have a huge impact on their lives – but the banks would hardly notice if you don’t pay.
Maybe this sounds a little too convenient, though. Perhaps you can see that the person considering the interests of their own family has a vested interest in the outcome, so that the supposedly altruistic motive of thinking of the needs of one’s family is really just a self-serving rationalization leading to filing bankruptcy.
Let’s use a different standard, then, one developed over time by Congress: what really happens in a chapter 7 or chapter 13 bankruptcy? Remember, not all debts are discharged in bankruptcy, not all property can always be protected, and not all persons can file just any type of bankruptcy they desire to file. Instead, Congress has made value judgments based on human morality, and it put those moral concepts into the federal bankruptcy laws. Congress has already performed the moral calculations regarding who comes first, the creditors or the family of the debtor who files a bankruptcy.
This might be all you need to consider. The purpose Congress was trying to serve in enacting the bankruptcy laws was the proper balancing of the need of a debtor to support his or her family, as compared to the need of certain types of creditors to get paid back, which involves making moral judgments. What’s more, the debtor has to pass a need-based “means test” to file chapter 7, and a debtor has to pay back what he or she can afford in chapter 13.
Furthermore, not all debts simply go away in bankruptcy. Congress decided that some creditors are better than others and that they deserve to get paid, no matter whether the debtor can afford to pay the debt or not.
For example, Congress decided that if the bank goes to the trouble of taking a mortgage on your house, then you still have to pay the mortgage even if you file bankruptcy. According to Congress, human morality dictates that such a debt either be paid or the house goes back to the bank, bankruptcy or no bankruptcy.
Another example is a car loan: Congress wrote in the bankruptcy law that the car loan has to be paid even if a bankruptcy is filed, no matter how badly the debtor might need to keep the car without paying.
Or income tax — Congress says back taxes don’t go away in bankruptcy. Remember, the IRS didn’t ask to be a creditor. The debtor unilaterally made the IRS into a creditor through inadequate wage withholding. There was never any loan agreement signed by the parties, as with other debts. And the government’s need for money has little to do with it: after three years, back taxes are dischargeable, on Congress’ theory that the IRS must not have cared too much about the tax debt, if it couldn’t collect the money over that period of time.
And child support — that can’t be discharged in bankruptcy. Congress simply made a moral judgment that the debtor’s obligation to support his children, and the children’s need for the money to live on, overrides a debtor’s “need” to free of that type of debt.
This brings us to the type of debt that most persons seeking bankruptcy relief want to shed in chapter 7 or 13: credit cards, bank loans and lines of credit. In contrast to the examples listed above, Congress decided that credit cards and similar debts ought, as a matter of human morality, to be discharged in bankruptcy. This is the kind of debt that persons fret, or even agonize, over discharging in bankruptcy. The point to remember is that Congress considered that question carefully, and after much thought, Congress said credit cards and similar debts just didn’t deserve getting back when a bankruptcy is filed.
Why, though? What’s different about this kind of debt that made Congress treat it so poorly? Okay, think about the credit card bank that you owe $10,000.00 to — did that bank take a mortgage on your house to secure payment? Did that bank charge five percent interest, like on your mortgage, or did it charge, say, twenty-five percent? Did the credit card bank verify your employment and income level, or did it simply dump five million credit card applications into the U.S. Mail and wait to see who, in all innocence, applied to be graced with their toxic credit card accounts? You probably already know the answers to these questions.
The point is that the bankruptcy laws enacted by Congress contain a balancing of competing interests, and Congress resolved these in the bankruptcy laws by considering, in its collective mind, the morality of each of its choices. It’s reasonable for us to defer to the morality of these choices when considering whether filing bankruptcy is the morally “right” thing to do.
When struggling with the decision of whether to file bankruptcy, don’t feel you have to decide between right and wrong, all by yourself, using only your own family’s needs as a standard to guide you. Remember, the rest of us have a stake in whether your boat rises or falls. Our bankruptcy laws as enacted by our representatives in Congress contain an impartial moral standard arrived at through years, even centuries, of legislative consideration of what your real responsibilities are. For persons who have to choose between buying groceries or paying their credit card bills, there really isn’t a need to think about it any further.