Bankruptcy:  It’s Legal, but is it Ethical?
By Richard P. Halverson

A recent Washington Post article said, “The number of Americans filing for bankruptcy exploded in the past quarter-century. In 1980, there was one personal bankruptcy filing for every 336 households in the United States; in 1993, one for every 144 households; and in 2003, one for every 73 households.”  (Washington Post Wednesday, March 2, 2005; Page A16)  The article goes on to say that, “There is little agreement on the cause of this growth.” 

The Deseret Morning News reported the following, “According to the Virginia-based American Bankruptcy Institute, or ABI, the top five reasons people file for bankruptcy are ease of obtaining personal credit and credit cards, loss of a job, financial mismanagement, medical problems and divorce.”  (Deseret Morning News, Tuesday, January 11, 2005)

Declining Levels of Personal Responsibility

Not mentioned by either of these articles is what I believe is the real fundamental problem.  I believe there is general decline in personal responsibility in society and a related increase in victimization mentality.  I believe this shows up in all kinds of negative ways.  I have not included any statistics here, but I am confident that bankruptcy statistics have increased right along with statistics for abortion, and even grade inflation, as well as many of the other problems that plague modern society.  At the heart of all these is an attitude of someone who does not want to take the difficult road of accepting responsibility for a bad situation and is willing to make his own life easier by shifting the burden to someone else.

I know I am generalizing and I do not mean to make blanket judgments.  I have been close to people in all these predicaments and have found myself reluctantly agreeing they were making the correct decision.  Still, on a larger scale these statistics suggest a new level of selfishness in this society that amounts to a serious fundamental and destructive problem.

If I’m correct that bankruptcies have increased as individual responsibility has declined, I have to ask, “Even if bankruptcy is legal, is it ethical?”  This question is particularly relevant for Mormons who are taught the importance of honesty and personal responsibility.

There Is a Place for Bankruptcy Laws

Bankruptcy laws exist for good reason.  Society learned long ago that debtors’ prison and indentured servitude are not acceptable ways of dealing with people who cannot afford to pay their bills.  When an otherwise productive person (or company) has exhausted all his/her options and becomes bankrupt, it is actually in society’s best economic interest to absorb the financial loss and return that person to financial health.  The problem comes when an increasing number of people take advantage of society’s generosity and opt for bankruptcy without exhausting all other options.

Here are reasons for financial insolvency that we can all sympathize with.

·         Medical expenses.

·         Catastrophes.

·         Business reversals and loss of income outside your control.

·         Divorce (realizing that financial problems are a leading contributor to divorce)

Even acknowledging that life throws some pretty nasty curves, you must admire those who have saved for such emergencies and/or make the effort and sacrifice to work through their financial problems without resorting to bankruptcy.

Here are some increasingly prevalent reasons for financial insolvency that we may not be sympathetic with.

·         Lack of financial discipline.  The inability to deny oneself anything that is wanted and can be financed.

·         People who simply do not want to repay when the time comes.

False Ideas

Frequently we find individuals who fall in these later categories hold some false notions about their problems.

First, many people really believe their financial problems are someone else’s fault — someone like the bank or credit card company that loaned the money. They see themselves as victims of these financial institutions.  They argue the lenders are making debt too easy to obtain.  Throw in here the idea that all the auto companies, retailers and travel agencies are also guilty because they make their products look so appealing. 

Yes, we live in a capitalistic society.  Businesses try to sell their products by making them attractive and easy to use.  A bank is trying to sell credit.  But we the consumers are still 100% responsible for the decisions we make.  No bank holds a gun to a person’s head and makes him finance a car that is way too expensive for him. 

Further, none of us can claim that we were even misled by these lending institutions and their slick advertising.  There are truth-in-lending laws.  This means the lender must provide the borrower with all kinds of information about the loan.  Most of us just sign the papers and spend little time processing what it all means.  We have only ourselves to blame for that.

Second, many people (perhaps even most) believe no one gets hurt except maybe some large faceless financial institution and its evil CEO.  Please understand that when one client files bankruptcy, the cost is borne by all the other clients that pay their bills.  It is simple.  A bank or a credit card company must make a profit, like all other companies.  If it does not, it fails.  When one of the bank’s customers files bankruptcy, the lending institution must recover that loss by charging higher fees and rates to other customers. 

Please, also understand that market competition eventually controls the profit margin a company will earn.  This means that if all bankruptcies magically stopped tomorrow, the positive impact on bank profits would be temporary.  Very soon competition among lenders would cause them to lower their fees and rates back down to the minimum level of profitability required by the market place thereby passing the savings on to their customers. 

A bankruptcy may seem impersonal but it is not.  A bankruptcy costs everyone.  I have long believed if people were able to put a face on their bankruptcy there would be a lot less of them.  Just imagine knocking on the doors of all your neighbors and telling them you want them to give you $100 as their personal fair share of your financial mismanagement.

New Law

Congress has recently passed new legislation making bankruptcy more difficult in some cases.  The legislation does a lot of things but in the simplest of terms it makes it more difficult for a debtor to simply wipe away all his debts.  Now under many circumstances the debtor will be required to accept a program of paying back some of the debt over a period of time.  It is hoped that this will cut down on the increasing numbers of individuals who are rather blatantly abusing the system and society’s generosity.

Are Mormons the Worst Offenders?

Oh how I wish the subject of bankruptcy was only an intellectual curiosity for Meridian readers.  I fear it is not.  I know the majority of Meridian readers are Mormon.  And there is evidence to suggest that Mormons may be worse than most in filing bankruptcy.  This evidence comes from the bankruptcy statistics of the State of Utah. 

For several years Utah has had the dubious distinction of leading the nation in terms of bankruptcy filings per household.  According to bankruptcy statistics compiled by U.S. Courts Administrative Office, Utahns are twice as likely to file bankruptcy as the national average.  I know that not all Mormons live in Utah and I know that not all Utahns are Mormons.  But statistically it would be hard to ignore the relationship.

Why Church Members?

The question is why?  The Utah economy is decent and certainly not below the national average.  Therefore, the reason for these bankruptcies must have to do with generally poorer financial management among Utahns than in the country at large.  I also fear it may somehow represent a poorer attitude toward the importance of accepting responsibility for one’s mistakes.

This is astonishing to me.  As Latter-day Saints we have been consistently taught by our leaders to avoid excessive debt, spend within our income and save for emergencies and retirement.  Church members in and out of Utah have been taught this long before Utah was Utah.  These numbers suggest that by greater numbers than non-Church members around the country, Mormons are ignoring this important counsel of our leaders.  To actually lead the nation in this category is as puzzling to me as if Utah led the nation in alcohol consumption.  In this category, of course, Utah is the lowest in the nation for very understandable reasons.

Here, then, is the question again. Bankruptcy: it’s legal but is it ethical, especially for Mormons?  Sometimes there is no good alternative to bankruptcy.  But bankruptcy always means taking money from someone else.  When a bankruptcy is not the absolute final alternative, then I believe it is unethical.  It is little different than stealing.  I believe this is especially regrettable for a Latter-day Saint.  I am confident most of these good people would not walk out of a store with extra change that didn’t belong to them.  Why then can they feel OK about running up their credit cards and other debts and then expecting their fellow citizens and ward members to absorb their losses through the process of bankruptcy?