The possibility of falling into a financial crisis exists for everyone. Events such as the death of the family breadwinner, a serious illness, or even loss due to a hurricane can quickly become financially life-altering. While these situations are often unavoidable, many people still feel embarrassed or ashamed when going through bankruptcy. But can there be ethical issues tied to bankruptcy as well?

Financial struggles significantly affect an individual’s physical and emotional well-being. Self-blame is common and can even result in anxiety and clinical depression. And let’s face it, the critical judgment of friends, colleagues, or family may causes morale to suffer even further.

When you have done everything you can to be fiscally responsible but still need assistance, filing bankruptcy serves a morally appropriate purpose: to protect good-faith individuals facing hardship and financial ruin by providing a clean slate and a fresh start.

When Bankruptcy is Not “Ethical”

Of course, not everyone is always fiscally responsible. Some individuals may have put themselves in financial hardship through reckless actions, such as chronic overspending, gambling, or simply walking away from legitimate obligations. In the eyes of the law, do ethics enter into the equation?

The answer is that although people may have acted unethically, creditors and lenders anticipate the risk of consumer non-payment, and those risks are calculated into their loan or interest rates. Therefore, nearly everyone can seek relief through the bankruptcy process. 

David VanHoose, Herman W. Lay Professor of Private Enterprise at Baylor and a professor of Economics, says there is a moral obligation to honor their debt to the other party. “A borrower has an ethical duty to avoid behaviors that significantly increase the probability of non-repayment of an obligation to a lender. In an important sense, a borrower is the steward of the funds that the lender has made available for the borrower’s use.”

Still, not all economists agree. Given the prolific use of bankruptcy and the ready access of creditors to borrower information, they believe all transactions are priced for the eventuality (therefore, no one is “hurt” except for the debtor themselves.) The bankruptcy will curtail that individual’s ability to access low-interest credit for up to a decade, so a built-in “punishment” does exist.

Bankruptcy in America

Approximately 523,000 claims were filed in America’s federal bankruptcy courts in 2021. Experts say that the stigma associated with bankruptcy has largely dissipated, becoming a valid and acceptable way for people to get back on their feet.

What are the moral and ethical variables we need to consider? Is it moral to consider bankruptcy a personal failure? Is it ethical to “let a consumer off the hook” for their debts? Is it acceptable for courts to make a moral judgment as to the responsibility of the person filing?

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, was written to prevent consumers from abusing the bankruptcy system. Experts say the reforms overall were effective, resulting in an increase in Chapter 13 bankruptcy filings. Chapter 13 establishes a payment plan with creditors involving a period of seven to 10 years. These structured bankruptcy plans allow for debtors to pay back their obligations, not just have unsecured debts erased.

Debt collectors have benefited from the act, as they have more opportunities to receive some payment from the borrower.

In Conclusion

It is ethical to give individuals the opportunity to wipe their financial records clean and enjoy a fresh start. It is also appropriate to expect a debtor to act responsibly in order to avoid another bankruptcy in the future. If you are considering bankruptcy, there is no need to feel shame or guilt. Bankruptcy law exists to give everyone a fair opportunity to thrive financially, regardless of circumstance.

Richard V. Ellis is a bankruptcy and family law attorney based in Sarasota, Florida.