When a legal entity is unable to pay its debts, bankruptcy law provides various options for the entity or individual to resolve those debts. Bankruptcy remedies are available to individuals, partnerships, and corporations. In 2009, more than 1.5 million bankruptcies were filed; more than 30,000 business firms filed for bankruptcy. The legal actions that result involve basic ethical norms, particularly those of fairness and compassion. Debtors, whether they are large firms or your neighbors, are in trouble. Should we help them? Before we can answer that question, we should consider several issues. What are the costs of that help? Should people or firms be able to consume resources without paying for them? What kinds of incentive effects do we create if we allow debtors to escape their obligations? Consider the following case example and, specifically, the effect of ethical norms in shaping your reaction to the situation. Woodcock graduated from law school and finished his MBA in 1983. His student loans came due nine months later. Because he was a part-time student until 1990, he requested that payment be deferred. Because he was not in a degree program, payment should not have been deferred under the terms of the loan, but the lender incorrectly approved the deferral. Woodcock filed for bankruptcy in 1992, more than seven years after the loans first became due. Hence, that debt was discharged unless there was an “applicable suspension of the repayment period.” The Dodd-Frank financial overhaul statute of 2010 created the Consumer Financial Protection Bureau which may regulate lenders that provide private student loans.a
1. What are the relevant ethical norms that affect your reaction to this case? Clue: Go back to the first place in the text where the concept of ethical norms first appears (Chapter 1). Which of the norms discussed there apply to the proper legal reaction to Woodcock’s debt?
2. Our legal system is in many regards governed by principles of personal responsibility. When a person signs a contract or accepts credit, we ordinarily expect that person to fulfill the terms of what we see as that person’s choice. Which ethical norms attach most closely to this theme of personal responsibility? Clue: For each ethical norm, ask yourself: Does this norm strengthen or weaken personal responsibility?