Sunday, August 19, 2012

I'll gladly repay you Tuesday...

The good news is that noncommercial bankruptcy filings in the U.S. were down by 13 percent in the first six months of 2012 compared to the same time period last year. The bad news is that 601,184 noncommercial bankruptcies remains a bundle.

Still, Samuel Gerdano, the executive director of the American Bankruptcy Institute, the outfit that tracked U.S. bankruptcy data provided by Epiq Systems, issued a statement that we're "on pace for perhaps the lowest total new bankruptcies since before the financial crisis in 2008."

A reader from New York recognizes that during the harsh economic conditions of the past few years, many people have resorted to bankruptcy. "It's hard for a former bankrupt to get credit, but it does get them out from under potentially crippling financial liabilities," he writes.

But, he asks, what of the creditors? They typically receive pennies on the dollar.

Granted, "this is a long-established custom and entirely legal, but it is basically a way of avoiding repaying debts that you've legitimately incurred."

He wants to know whether  it is ethical not to pay back such debts.

Several years ago -- about a decade before the current economic downturn began -- I looked at a similar question for an article I wrote for a business publication. When a business goes belly up, are the company owners responsible to go beyond what the law requires in paying back vendors and others money owed for providing goods and services?

Some of the business owners I interviewed believed that meeting the requirements of the law was what was required so they met that obligation.

They did the right thing by doing so. And the same would hold true now for anyone unable to pay his or her debts who decides to file for bankruptcy protection. As long as they are honest in their financial reporting and meet the requirements that the bankruptcy courts set for them, these folks have behaved in a way that their communities have agreed is acceptable behavior.

But meeting the minimum requirement isn't enough for some. One businessman I spoke with for that article had failed at a furniture-making company he had started. After his company was liquidated in 1989, he said others were about $10,000 short of what they would have been paid if the company hadn't gone under. Legally, he was free to walk away. But over the next four months, he slowly paid everyone back.

"I guess it's just a moral or ethical issue for me," he told me at the time. "When we make a decision to do something, we should be able to explain that decision in the same way to anybody who asks, be it our spouse, our business partner, an employee, a creditor, or a customer. I have to sleep at night."

Sometimes, it might be impossible for debtors to make good on their entire debt as this fellow did. But when the opportunity arose to do what he believed to be the right thing to do, he did it. Doing so allowed him to sleep at night and undoubtedly built some good will that served him well as he later went on to build a successful manufacturing company in Indiana.

Jeffrey L. Seglin, author of The Right Thing: Conscience, Profit and Personal Responsibility in Today's Business and The Good, the Bad, and Your Business: Choosing Right When Ethical Dilemmas Pull You Apart, is a lecturer in public policy and director of the communications program at Harvard's Kennedy School. 

Follow him on Twitter: @jseglin 

Do you have ethical questions that you need answered? Send them to

 (c) 2012 JEFFREY L. SEGLIN. Distributed by Tribune MediaServices, Inc.


Anonymous said...

When you are a private individual and had to declare bankruptcy, that legally means you do not have to pay your financial obligation. It would be the unusual private person who would see the need to pay such an obligation after being declared bankrupt. Bankruptcies are a legal procedure and thus, the law says you do not have to repay your obligation and thus, you do not need to pay it. If a businessperson sees a moral obligation to pay some or all of the debt obligation after a bankruptcy, that is much to his or her credit and an indication of great moral character.

Charlie Seng
Lancaster, SC

Anne P said...

How about if you consider your debt unethical? For instance, Student Loan debt whose interest compounds so quickly that if you lose your job and get behind you have no chance of ever catching up. The bank won't work with you on modifying your payment plan. You declare Chapter 7 bankruptcy and learn your student loans were charged off by the bank. You are told by the bank they would be happy if you paid the loans back when able but since they have been charged off you are not legally required to.