A lot of people are thinking that bankruptcy is a one-way streak. They basically look at the whole bankruptcy process in terms of what’s in it for them. I really can’t say I blame them. I mean, if you are dealing with a huge amount of debt and you’re sick and tired of seeing those credit card bills and past-due notices come in the mail, it’s easy to believe that you’re the number one beneficiary of bankruptcy.
In fact, most people believe that they’re the only beneficiary of bankruptcy. Well, you are more than welcome to think that way, but in reality society as a whole benefit from bankruptcy laws.
Now, you might be laughing out loud because you may be thinking that society’s losing out because all these people who racked up these bad debts are able to discharge those debts. You might be thinking that if those people are able to get out from under all those bad financial decisions, then society as a whole lost out. How can anybody say with a straight face that there’s actually a positive gain from bankruptcy?
To understand why bankruptcy codes exist, just look at what it replaced. For the most part, especially in Western Europe, there were institutions called debtors’ prison. If you owed people a lot of money, they can go through legal proceedings and you can end up behind bars. The whole idea is for you to work in prison to pay off your debts. It doesn’t take a genius to see that this is a very ineffective and inefficient way of dealing with debt.
You have to understand that once people are in jail, they don’t really have any incentive to work hard so that they can take care of their debts. They’re going to put in the least amount of effort and try to get around what’s required of them. Talk about a self-defeating process. It is a minor miracle that debtors’ prisons actually lasted as long as they did, considering the systemic inefficiencies they brought to the table.
Bankruptcy is not just more humane, but it’s actually more efficient as far as the overall general economy is concerned. Bankruptcy laws are there for a reason. They did not happen by accident. They did not happen by some sort of weird experiment that people didn’t thoroughly check out. There’s a lot heavy thinking that went into bankruptcy laws. Regardless of which jurisdiction you’re in, there is a reason why the bankruptcy in your area is in its present shape. There’s been a lot of trial and error. There’s been a lot of experimentation and you can rest assured that the reason why we have bankruptcy that have the form and benefits that they have now is because of some heavy analysis as well as real work experience.
The truth is, bankruptcy laws benefit the economy. That’s the big picture winner of bankruptcy. Don’t fool yourself, bankruptcy laws don’t exist to benefit the consumer.
I’m not saying that consumers don’t benefit at all. After all, seeing those tens of thousands of dollars in debt that you will probably never ever get around to repay disappear is a great thing. Being able to get a fresh start and being able to take financial risks once again is a great thing from a personal perspective. However, beyond the personal level, these benefits also produce net positive effects on the greater economy.
When people are able to move on from their bad personal financial decisions, they are able to take more risks. They are able to take advantage of new opportunities. You have to remember that economies grow and flourish when people have a high degree of freedom. The more risks they take the higher the chance that some of those risks will pan out. As a result, there will be jobs generated and more taxes paid. Do you see how these are all interrelated to produce a net positive, not just for the individuals involved but for society as a whole?
This is the spirit behind modern bankruptcy codes. They are calculated to maximize risk taking and bring in a certain level of predictability. What’s predictable about bankruptcy is that if you do hit a rough spot and there is no way to get out of that debt hole you found yourself in, you can declare bankruptcy. There is a degree of predictability there because for the next few years you can’t declare bankruptcy again. This gives you a way to calculated risks. At the very least that there is going to be some sort of legal net catching you if you fall.
You benefit, but not as much as the system. That is the whole reason why bankruptcy laws. Don’t kid yourself into thinking that all these lawmakers from the moneyed classes of society put together these bankruptcy codes out of the kindness of their hearts. There’s some cold-blooded calculation and heavy analysis put into these bankruptcy codes, so don’t feel too bad that you have to declare bankruptcy. Focus instead of the fresh start it’s giving you and the bright future you could make for yourself thanks to bankruptcy laws.
If that’s how you think, then chances are you will make the most out of your bankruptcy proceeding and get a fresh start on your financial life. This is exactly the outcome that the architects of modern bankruptcy laws envisioned.
So don’t feel too bad about bankruptcy. It exists for a reason. As long as you aim to come out of bankruptcy a much stronger and wiser person, everything will work out for the best. At the very least, you should use your filing to get a new set of personal financial habits going. It’s not going to be easy. Change is never easy but if you are serious about turning a new leaf, you will make progress. Count on it.