While filing bankruptcy has been looked on by some as “morally wrong”, and maybe even “Criminal”, the basic concept of Bankruptcy is Biblical and can be traced all the way back to the Old Testament. The Book of Deuteronomy (15:1-2) states “Every seventh year you shall practice release of debts. This shall be the nature of the release: Every creditor shall forgive the due that he claims for his neighbor; he shall not dun his neighbor or kinsman.”
As a general rule, creditors do not like bankruptcy, most likely because they may lose money when a debtor files bankruptcy. However, bankruptcy is really a fair process as it preserves the status quo. This basic policy is that the Court steps in between the creditor and debtor and protects the assets of the bankruptcy estate so that they can then liquidate any non-exempt assets so that the cash proceeds can be fairly distributed between the creditors.
Another equally important purpose of the Bankruptcy code is to give the Debtor a “Fresh Start”. The Supreme Court of The United States has even held that “The Principal purpose of the Bankruptcy Code is to grant a fresh start to the honest but unfortunate Debtor”.[1] While this fresh start could be seen as helping the nations poor or destitute, and in fact it does, bankruptcy has been shown to be a greater help to the nations middle class.
While filing bankruptcy may be considered a “last resort”, the Fresh Start afforded by the Bankruptcy Discharge allows the Honest but Unfortunate Debtor to reset and rebuild one’s credit. Good or Bad? I tend to think that a system that helps the Honest but Unfortunate Debtor from being burdened down with huge debt but rather to get a Fresh Start is not only good for the Debtor, but also good for the nation’s economy.
[1] Marrama Vs. Citizens Bank of Mass. 549 US 365,367 (2007)