Wednesday, March 09, 2005

The Federal Stone Sanguinity Act of 2005

The recent proposed bankruptcy reforms in favor of credit card companies have the blogosphere talking about the nature and justification of bankruptcy. Prof. Reynold's got an email questioning "Isn't present Bankruptcy law (the fundamental purpose of which is to allow a party who freely entered into a contract to repudiate their obligations under the contract) contrary to basic libertarian values?".

No. Bankruptcy is an admission of reality. The debtor is not going to pay his debts. He does not have the will and/or means to gain the money, and you don't have the means to make him get it. No amount of asking, begging, pleading, arm-twisting, nastygrams or legal threats will get him to pay. You can ask the debtor to pay and he won't. You can threaten the debtor to pay, and he still won't. You can garnish his wages, and he can refuse to work, if he was ever able to in the first place. You can put him in prison, and he can still refuse to pay you. You can force him into slavery (arguably excepted to in the Thirteenth Amendment), and he can still refuse to work. You can kill him, and he can definitely refuse to pay you. Even if some degree of duress or torture will get your money back, that degree may be too unconscionable or impractical to inflict.

Bankruptcy is legal acknowledgement that (1) certain duties to another are too onerous or degrading to oppose on a human being, (2) certain rights are too precious to a human being to be given away, (3) the law cannot effect all verbal affirmations into reality, like a god or magician. In this sense, bankruptcy does not punish irresponsible debtors who think the government will bail them out of their poor spending decisions, but irresponsible creditors who think the government will bail them out of poor business decisions.

For this reason, the proposals to except credit card debt may be unwise. As one NC attorney said in this WaPo article "People would be better off if they stopped paying. They may harass you, but your balance doesn't keep rising. That's the irony." In the end, no matter how many laws the creditor has on its side, a debt from a deadbeat is nothing more than a false hope that he will actually pay.

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