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Values and Expectations About the Discharge

posted by Bob Lawless

A while back, I posted about the daunting task of summarizing all of U.S. bankruptcy law in a 75 minutes class for non-U.S. graduate students. The class was part of a course to introduce the students to various areas of U.S. law. In the end, the class turned out to be a lot of fun to teach and required me to think seriously about what I consider to be the essential elements of bankruptcy law. When the class began, I let the students take charge of the discussion. Perhaps not surprisingly, we spent very little time talking about the finer doctrinal points of U.S. bankruptcy law. What took up most of the class was the concept of a discharge in bankruptcy.

The students seemed to equate a bankruptcy law with the concept of a discharge. If it did not have a discharge, then it was not a bankruptcy law. Indeed, I somewhat felt that the students were expecting to hear me talk only about the bankruptcy discharge. I lectured a little bit about the historical development of a discharge, including the historical fact that, for a good part of the 19th-century, people got a discharge simply by moving west in the U.S., beyond the practical reach of their creditors. That was not what they wanted to hear.

What was puzzling to most of these international students was why the law would ever grant a discharge. I suppose that can be puzzling even to U.S. law students, but it seemed a particular challenge to this particular set of students.  As one student asked, "If I have borrowed 5 from you and promised to pay it back, why should I only pay 2 instead of 5?" I am a law professor, so I responded Socratically--"What if there is no hope you ever will pay back the 5?"  "Why should that forgive me from paying the 5?" was the answer. This was clearly going to require a different approach.

Everyone seemed to readily agree that if your house or livelihood are destroyed in a hurricane, the government should help you, including the possibility of debt forgiveness. On the other hand, the students concluded that profligate spenders are not deserving of relief. The question in the room was how many bankruptcy filers were victims of circumstances beyond their control (like the hurricane). That, of course, is an empirical question.

There were students from Asia, South America, and Europe, and there was strong disagreement in the room about the reality of that empirical question. The glib assessment is often to ascribe international differences of opinion to different values. In this instance, it was not different values at work. Rather, the students had different assumptions about how the world worked. The students seemed to be more or less willing to believe that someone would fail economically due to circumstances beyond that person's control. Although I could discern no pattern to the students' beliefs, it struck me that the same dynamic plays a central role in U.S. policy debates about bankruptcy law. My next post will talk about this idea. 

Comments

Bob, an article in The New Yorker 4 or so years ago made the interesting point that in Japan, where a discharge in bankruptcy was either very limited or not available, entreprenuership,i.e.leveraged risk taking, was virtually nonexistent. In the U.S. of course small businesses are everywhere. Because of cultural and other factors, the article recognized a correlation without drawing any firm conclusions about causation. If one wanted to go out on a limb, one could hypothesize that the broad discharge available in the U.S. facilitates the small business sector of our economy.

Great point. This is more than hypothesis. Several articles gather data showing that harsher personal bankruptcy laws discourage entrepreneurial activity. See John Armour, "Personal Insolvency Law and the Demand for Venture Capital," 5 European Bus. Org. L. Rev. 87 (2004); Wei Fan & Michelle White, "Personal Bankruptcy and the Level of Entrepreneurial Activity," 46 J.L. & Econ. 543 (2003). Professor Armour has another paper with D.J. Cumming that I could not readily locate, but it shows the same thing.

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  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, click here to visit the page for the list and then click on the link for "Subscribe." After completing the information there, please also send an e-mail to Professor Lawless (rlawless@illinois.edu) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.

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