Bankruptcy Alphabet: T is for Tension

In my bankruptcy alphabet, T stands for Tension. I’m not talking so much about the tension the person filing bankruptcy feels, though that is real and not to be discounted.

I’m talking about the tension in the law that balances the interests of creditors with the interests of debtors.

Bankruptcy law in the US recognizes that the society as a whole benefits when individuals are relieved of oppressive debts.  Tom Friedman of the NYTimes in particular applauds the positive impact on innovation when the price of a failed start up is not lifelong indebtedness.

In the past, those unable to pay their bills were tossed into prison until they paid (please tell me about the logic of that approach). Now debtors walk out of bankruptcy with their exempt assets to facilitate a fresh start.  Here in Silicon Valley, they often join a start up, or found a start up.

Creditors, in the push-pull of a bankruptcy case, share in any non exempt assets the debtor has, according to the priority of their particular claim. The means test provides an (imperfect) brake on high income individuals dumping their debts in Chapter 7.

Some debts are simply non dischargeable because we’ve made a collective decision that policy reasons favor the creditor.  Think recent taxes, child support, drunk driving judgments and intentional bad acts:  they are all non dischargeable and survive the bankruptcy.

Creditors who bargained for collateral generally get to keep their lien on the asset despite the bankruptcy.  Liens after bankruptcy.

In reorganization cases, judges have to modulate the tension between the desire of the debtor to reorganize and the creditor’s desire to cut their losses and get out.

The recognition in law  of the tension debtors versus creditors is a strength of our American approach to debt and credit.  Don’t let anyone tell you that bankruptcy costs our economy too much.

This wonky bit has been brought to you by the letter T.

Jay Fleischman, from his lookout in Los Angeles, thinks T is for Trustee.

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My bankruptcy alphabet A-Z

Image courtesy of Leo Reynolds.