Abstract: I. INTRODUCTION Bankruptcy law is generally thought of as being purely economic in nature.1 For corporate bankruptcy law, this generalization is largely correct, as corporate bankruptcy is grafted onto a preexisting framework of limited liability corporation law. For consumer bankruptcy law, however, this belief conceals the realization that bankruptcy law is also, if not primarily, social legislation.2 When individuals file for bankruptcy, they obtain relief from debts incurred or have their debts entirely forgiven. Essentially, this process creates a system of legalized post-contractual opportunism.3 This post-contractual opportunism is justified in large part by the moral judgment that an honest but unfortunate debtor should be entitled to a discharge of debts.4 Although some recent scholars have examined the moral foundations of consumer bankruptcy law, these discussions focus almost exclusively on the moral foundations of the fresh start and ignore the larger moral and social issues raised by bankruptcy law.5 Bankruptcy law is not just economic legislation, but social legislation that establishes how far individuals should be expected to go on carrying responsibilities that have grown onerous.6 This article examines the idea of bankruptcy law as social legislation, investigating the implicit moral and social judgments embedded in bankruptcy law and in the recent arguments over the propriety of bankruptcy reform legislation. II. THE MORAL CONSEQUENCES OF BANKRUPTCY Individual bankruptcy has been morally condemned throughout most of human history. Debtor's prisons, for example, remained the dominant response to bankruptcy through most of the world until recent times.7 The severity of the moral and legal condemnation traditionally associated with bankruptcy reflects the gravity of the act. In part, this morality reflects the fact that for most of human history, and during the formative period of both our psychological makeup and most major religious codes, individuals lived in static economies.8 Wealth was a fixed pool that could be redistributed, but there was no sense in which wealth could be invested, thereby generating greater social wealth in the future.9 As a result, there was also no sense in which money could be borrowed and lost in an entrepreneurial activity designed to increase wealth.10 Borrowing was purely a short-term transfer from the lender to the borrower and the borrower was expected to repay it. A debtor therefore had no good explanation for why he might later be unable to repay the loan. The failure to do so was therefore traditionally considered a form of fraud or theft, punishable by similarly severe sanctions.11 A legal discharge of debts through bankruptcy did not exist. In a static economy, the idea of charging interest was condemned as making money off money.12 It was viewed as a zero-sum redistribution from debtor to creditor just as bankruptcy was seen as a zero-sum redistribution from creditor to debtor. Only when the concept of economic progress and the understanding of investment and capital growth became established did the idea of charging interest become morally acceptable.13 Given the modern appreciation of investment as the source of economic growth, it is understandable why bankruptcy is taken for granted in the context of business investment. Although bankruptcy may now be acceptable in the business context, bankruptcy remains suspect in many countries and legal systems as a remedy for individuals.14 The opprobrium of bankruptcy is easy to understand. Incurring a debt creates a contractual and moral obligation to repay that debt. The failure to repay a debt usually exposes the debtor to severe legal sanctions. Today, default entitles a lender to seize the debtor's nonexempt property in satisfaction of the debt.15 In addition to legal obligations and sanctions, borrowing imposes various moral obligations, whether self-imposed or enforced by society. …
Publication Year: 2001
Publication Date: 2001-04-01
Language: en
Type: article
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Cited By Count: 4
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